FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report October 22, 2003
(Date of earliest event reported)
DENTSPLY INTERNATIONAL INC
(Exact name of Company as specified in charter)
Delaware 0-16211 39-1434669
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
570 West College Avenue, York, Pennsylvania 17405
(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Company's telephone number including area code)
Item 7. - Financial Statements and Exhibits
(a) Financial Statements - Not applicable.
(b) Exhibits:
99.1 Transcript of the Company's conference call which it conducted on
October 22, 2003 related to the third quarter 2003 sales and earnings
release issued October 21, 2003 as referenced in Item 12.
Item 12. - Disclosure of Results of Operations and Financial Condition.
The following information is furnished pursuant to Item 12, "Disclosure of
Results of Operations and Financial Condition."
On October 22, 2003, the Company conducted a conference call to discuss the
sales and earnings release for the third quarter of 2003 that was issued on
October 21, 2003 and to answer any questions raised by the call's audience.
The transcript of this conference call is attached hereto as Exhibit 99.1 and
is hereby incorporated by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DENTSPLY INTERNATIONAL INC
(Company)
/s/ Bret W. Wise
Bret W. Wise
Senior Vice President and
Chief Financial Officer
Date: October 27, 2003
DENTSPLY INTERNATIONAL
Moderator: John Miles
October 22, 2003
7:30 am CT
Operator: Good morning. My name is Jodi, and I will be your conference
facilitator today.
At this time I would like to welcome everyone to the DENTSPLY
International Third Quarter Earnings Release conference call.
All lines have been placed on mute to prevent any background
noise.
After the speakers' remarks there will be a question and answer
period. If you would like to ask a question during that time,
simply press Star then the Number 1 on your telephone keypad. If
you would like to withdraw your question, press the Pound key.
Thank you.
I would now like to turn the call over to Mr. John Miles,
Chairman and CEO. Sir, you may begin your conference.
John Miles: Thank you, Jodi.
Good morning, everyone. And thank you for joining the DENTSPLY
Third Quarter 2003 conference call.
My name is John Miles. I'm DENTSPLY's Chairman and Chief
Executive Officer. And with me this morning is Gary Kunkle,
President and Chief Operating Officer, and Bret Wise, Senior Vice
President and Chief Financial Officer.
As is our usual format, I'll start by giving some overview
comments concerning our third quarter results as well as our
overall business. Bret will then go through a more detailed
review of the P&L and balance sheet. And finally we'd
collectively be pleased to answer any questions that you may have.
Before starting I need to read our Safe Harbor statement. In
accordance with the rules of the Securities and Exchange
Commission information discussed during this conference call
including the question and answer session will be part of an 8-K
filing that will be made by the company after the call.
To the extent that during this conference call any non-GAAP
financial items are discussed the additional information required
by the SEC about such non-GAAP matters will be available through
our Website by going to DENTSPLY.com, then going to the investor
relation section and clicking on the SEC filing link, which will
then provide access to the 8-K filed for this conference call and
further information about any non-GAAP items.
The conference call may include forward-looking statements and,
as such, are made in accordance with the Safe Harbor provisions
of the Securities Litigation Reform Act. Forward-looking
statements involve risks and uncertainties, which could
materially affect the company's business and should be considered
in conjunction with the risk factors and uncertainties described
in the company's most recent Annual Report on Form 10-K.
I'm sure each of you have received a copy of our third quarter
earnings announcement released yesterday after the market
closed. I'm very pleased to report that DENTSPLY achieved both
record sales and profits for the third quarter.
Our reported sales for the third quarter were $400.4 million, a
9.4% increase over the year earlier period. On an ex-precious
metals basis sales increased 9.1%. Diluted earnings per share
were $.51, an increase of 13.3% over the year earlier quarter.
The 9.1% sales gain ex-precious metals for the quarter broke out
as follows: The dental-base business grew 4.1%, non-dental-base
business was unfavorable .2%, currency exchange was favorable
5.1%, and acquisitions/divestitures net were favorable .1%.
As first reported in our second quarter 2003 conference call
sales of Cercon machines continued at a low level during the
current quarter and were behind machine sales from the year
earlier period. Of course, these machine sales represent a very
low profit contribution.
The reduction in Cercon machine sales masked some very solid
achievements by our company in the quarter. Heavy equipment
sales without Cercon units increased by strong double-digit
levels while dental consumable sales in the United States and
Europe combined increased by 6%, significantly faster than the
overall market growth.
Further good news is dentist prescriptions for Cercon crowns and
bridges continued to increase rapidly and are partly responsible
for the excellent dental consumables growth achieved during the
quarter. Recent market research shows a continued shift by
dentists from porcelain fused to metal to ceramic crowns and
bridges. As the number of dentists who have prescribed a ceramic
restoration have increased from 16% to 31% during the past year
in the United States. Cercon prescriptions have increased
five-fold during this period, yet sufficient capacity from
installed Cercon machines is capable of supporting vastly larger
future growth.
Dental base business growth on an ex-precious metal basis broke
out as follows on a geographical basis - in the United States
4.4% growth. Strong sales growth was again achieved by our GAC
Orthodontics division led by increases in their In-Ovation-R
self-ligating bracket and their Mystique clear bracket as well as
by Tulsa Endodontics and their nickel-titanium endodontic files.
Cercon prescriptions continued to increase sharply while sales of
Cercon machines decreased as previously mentioned. The overall
US dental laboratory market remained moderately down.
Europe/CIS grew by 6.2%. European sales were led by extremely
strong growth in dental implants and general dental consumables
across all European countries.
Asia had negative growth of 6.8%. Frankly this result was
somewhat of a surprise as the SARS crisis is over and dental
visits have returned to close to their historical levels. In
analyzing what happened it appears this reflects an inventory
adjustment by our Asian dealers. You may recall that in the
first quarter of 2003 we reported growth of 17% in Asia despite
the SARS crisis. In hindsight our dealers didn't adjust their
ordering patterns rapidly enough to the SARS crisis and used the
third quarter to reduce their inventories to normal levels.
Latin America achieved positive growth of 2.8%. And our Latin
American businesses continue to show modest growth led by Brazil,
Chile, and Argentina.
And the rest of the world grew 1.7%. Solid sales growth in
Canada was offset by decreases in other parts of the world.
Moving on to some business topics, on September 24th the
DENTSPLY's Board of Directors announced a long planned management
succession. I'll be retiring effective year-end 2003 but will
remain as Chairman of the Board. Gary Kunkle, DENTSPLY's
President and Chief Operating Officer will assume the
responsibilities of Vice Chairman of the Board and Chief
Executive Officer. Tom Whiting, currently Executive Vice
President will become DENTSPLY's President and Chief Operating
Officer.
Gary, Tom, and I have worked together for years. And Gary and Tom
are exceptional executives who are fully capable of leading our
company forward in the future. My personal observation is that
DENTSPLY has never had a stronger, more capable senior management
team.
An update on the long-running Department of Justice case
concerning US Artificial Teeth - on August 11th the district
court judge hearing the case issued a ruling in favor of
DENTSPLY. The 160-page opinion was meticulous and well
reasoned. The US Department of Justice has filed an appeal with
the Third Circuit Court of Appeals on October 15th. We remain
confident that the appeals court will uphold the verdict of the
district court.
Work continued at a rapid pace at our new Sterile Filling plant
just outside of Chicago. Phase one, which is the sterile portion
of the plant construction, has been completed. Currently final
validation of all systems and processes are underway. Media
challenge tests commence later this month, and stability trials
are scheduled to start the third week in November. Final
approvals from various world regulatory bodies are targeted to be
received from June 2004 through year-end of that year.
Oraqix European regulatory approval targets remain the same as
reported last quarter. Approval has been received from Sweden,
our EC reference country, with other European country approvals
expected throughout the first half of 2004.
US FDA approval is anticipated by year-end 2003 with a mid-year
2004 launch as molds and automated assembly equipment for the FDA
required packaging modification will have to be installed and
validated before commencing sales.
New product launches are creating excitement at DENTSPLY as
several key new product launches, which include an electric
handpiece, a new dental implant surface treatment, LED curing
lights, and a significant broadening of the Preventive product
line will occur between now and year-end.
Let me conclude by reviewing our guidance for 2003. Last quarter
we gave guidance in the $2.07 to $2.10 per share range without
consideration of the one-time gain on PracticeWorks stocks and
warrants, which will be realized in the fourth quarter. Today we
are comfortable at the top end of this guidance range. Of
course, it is possible that, if our business continues to perform
strongly, that this guidance could, in fact, be exceeded.
Before I turn the conference call over to Bret Wise, Gary Kunkle
will update you concerning our new European logistics center
initiative.
Gary Kunkle: Thank you, John, and good morning.
Earlier this month we informed our third-party contractor that
manages our European distribution center in Nimejen that we will
be terminating our relationship with them. And during the fourth
quarter, the current quarter, we'll be moving our distribution
from their facility to our own DENTSPLY managed facility in
Radolphzel, Germany, which is really near Konstanz where we have
one of our largest manufacturing facilities in Europe.
Just some rationale for the move - while we have seen reduced
costs, and reduced inventories, and improved service levels at
this Nimejen facility since we consolidated our European
distribution operations there in 1999, we really feel that the
probability of continued improvement towards our future
improvement goals, at least at the pace that we expect, is
questionable. So our conclusion is that these goals can be more
effectively met and achieved under DENTSPLY's management.
With that in mind the move will commence during the fourth
quarter, and it should be completed during the first quarter of
2004. A one-time cost of approximately $1 million will be
incurred in the fourth quarter. An additional $300,000 will be
incurred in the first quarter of 2004. And that will be offset
by a similar amount of savings in the balance of 2004. So the
impact on 2004 is neutral. Beginning in 2004 we expect to
realize a minimum of a $750,000 improvement in cost savings
annually as we move forward.
A one-time inventory build of approximately $8.5 million or four
days will be necessary during the fourth quarter to ensure that
we maintain adequate service levels during the transition. We
finished the third quarter at 100 days, which was a 2-day
improvement down from 102 days in the previous quarter. Even
with the 4-day build for the transition we still expect to finish
the year at approximately 102 days.
This move is well planned. And we are confident that it will be
executed with no disruption to service.
So that gives you kind of a summary of the plan, some
expectations of its cost and its benefits. So with that I'll
turn the call over to Bret for a financial update.
Bret Wise: All right. Thank you, Gary; and good morning, everyone. Thank
you for joining us on our third quarter conference call. I have
a few comments on earnings and cash flow for the quarter and then
just a couple comments on changes in the balance sheet.
So starting first with the P&L, as John mentioned, sales
increased in the quarter by 9.4% and 9.1% without precious metals.
Internal sales growth for dental was 4.1% and currency added 5.1%
to sales without precious metals.
Gross margin ex-precious metals were 54.1% compared to 55.2% in
the 2002 quarter. The slightly lower margins this period were
driven by a shift in mix, both geographical mix and product mix.
We expect margins to increase somewhat going forward with the
many new product launches planned for the fourth quarter, as John
described earlier.
SG&A as a percent of sales improved one full percentage point
from 36.6% of sales excluding precious metals down to 35.6% of
sales, again excluding precious metals.
Operating margins ex-PM were 18.5% in the current quarter versus
18.9% in the prior year quarter. The 2002 quarter included a
gain on an insurance settlement of approximately $780,000, which
we show separately in the income statement on the restructuring
line. Absent that gain the margin in 2003 would have been
roughly the same as the margin in 2002.
The third quarter is usually our lowest margins for the year due
to vacation shutdowns that occur throughout Europe in August.
And we would expect operating margins to improve somewhat here in
the fourth quarter.
Net interest and other expenses were $4.2 million compared to
$9.3 million in the 2002 quarter. The current year includes $5.7
million of net interest expense, exchange gains of just under $1
million, and net other income of approximately $.5 million. In
the prior year we had net interest expense of $6.6 million,
exchange losses of close to $1 million, and net other losses of
$1.5 million, the largest portion of which was a $1.2 million
loss on the valuation of the PracticeWorks warrants in the 2002
quarter.
Regarding PracticeWorks, the sale to Kodak closed in October.
And accordingly we expect to receive our proceeds from the common
stock and the warrants in the fourth quarter and anticipate
recording a gain upon receipt of those proceeds of approximately
$5.8 million pre-tax. Proceeds on the transaction should be
approximately $23.5 million.
The tax rate for the third quarter was 32.5%, which is the same
rate as we had in the first half of 2003 but higher than the
31.1% reported in the third quarter of 2002.
And as announced, net income of $41.3 million represents a 15.5%
improvement over the prior year. And earnings per share of
$.51represent a 13.3% improvement over the $.45 reported for the
third quarter of 2002. And again the third quarter of 2002
included a $.01 per share gain from the insurance settlement that
was previously mentioned. So obviously absent that gain in the
prior year, the growth in earnings per share would have been
higher than the 13.3% that you see in the earnings release.
Turning to cash flows we had a very strong quarter for cash flow
generation. And this is continuing a trend that's been present
for all of 2003. Cash flow from operations was approximately $71
million in the quarter bringing the total cash flow from
operations for the nine months to $167 million. This is a 65%
increase over the $101 million in cash flows from operations that
we reported for the nine months ended September 2002.
CAPEX for the nine months in 2003 is $55 million. That's
bringing free cash flow, which we define as operating cash flow
less CAPEX, to $112 million through the first nine months of 2003.
Depreciation and amortization for the quarter was $11.9 million,
and that brings the total for the year to $36.9 million.
During the third quarter we used free cash flow to repay
approximately $47 million in principle amount of debt. And in
addition to that we grew our cash balances by $10 million.
At the end of September we had $91 million in cash and reported
debt of $806 million of which $23 million is reported in current
liabilities.
Our net debt to total capitalization ratio now stands at 37.8%
reflecting the reported debt of $806 less the cash of $91 million
and less the value of our currency and interest rate swaps of $86
million, which is reported in other current assets on the balance
sheet. As we said before, our target range for this ratio is 35
to 40%. And we're very pleased to be back within that range
having started out in the high 50s following a series of
acquisitions in 2001. So in less than two years that ratio has
improved by just about 20 percentage points.
For the rest of the year we see continued strong cash flow during
the fourth quarter. Looking at uses of cash, as we've discussed
before, we're working towards completion of the Pharma plant in
Chicago by mid-year 2004. We're trying to accelerate work on
that plant to the extent possible. Accordingly we expect capital
expenditures for all of 2003 to range between $75 and $80
million. And for 2004 at this point on a preliminary basis we
expect approximately $65 million of capital expenditures.
Following the completion of the Pharma plant we would expect our
annual CAPEX to return closer to historical levels of $55 to $60
million annually.
Other potential uses of cash in the fourth quarter include $20
million of borrowings that we have in Japanese yen, which mature
in December. Earlier in the year we said we might roll that
over, but with our cash position that we have today we expect now
to retire that upon maturity late in the fourth quarter.
We're also anticipating later this year the approval of Oraqix,
which will trigger the final $16 million payment to AstraZeneca.
This is the last piece of that acquisition. And I guess at this
point we would expect that payment will most likely come in the
first quarter of 2004.
We're also currently in arbitration with Degussa to resolve a
potential purchase price adjustment of up to $10 million. This
is also the last potential item on the Degussa transaction. And
that could potentially be resolved in the fourth quarter and, if
not, probably some time early in 2004.
Offsetting these potential uses of cash, we do expect to receive
$23.5 million in proceeds from our common equity holdings and the
warrants we have in PracticeWorks. So given these circumstances
and our strong cash flow and the much improved capital structure
that we have today we're generally expecting to allocate
approximately half of our cash flow to acquisitions and half to
further strengthening the balance sheet in the near term.
Looking at changes in the balance sheet, year-to-date currency,
which is primarily the strength of the Euro, the yen, and the
Swiss franc, has increased the dollar amount of our reported debt
by $84 million year-to-date. Offsetting that we've actually
repaid approximately $52 million of debt from free cash flow,
bringing the net increase in reported debt including the piece
that's in the current liabilities to $32 million for the year.
And again, that increase is due entirely to the weakening of the
US dollar versus the currencies, which our debt is denominated in.
Currency has also affected various other accounts on the balance
sheet this year. Year-to-date goodwill has increased by $55
million. That's due almost entirely to the currency
translation. And likewise our equity has increased $199 million
this year, of which $67 million is due to currency translation.
As a final point, we've been focusing on the continuing efforts
to reduce our inventories this year, which have declined by two
days this quarter versus the second quarter and now stand at 100
days. As Gary mentioned, we see a modest increase in this
measure at year-end due to the transfer of the European logistics
center after which we plan to get back on track in reducing
inventories.
That concludes our prepared remarks. I'd like to thank you for
your interest in DENTSPLY and listening in this morning. And I'd
like now to turn the call back over to the operator for
questions. Thank you.
Operator: At this time I would like to remind everyone in order to ask a
question please press Star then the Number 1 on your telephone
keypad. We'll pause for just a moment to compile the Q&A roster.
Your first question comes from Frank Pinkerton from Bank of
America Securities.
Frank Pinkerton: Hi. Thanks for taking the question. I guess my question
is in Europe you mentioned some things that drove the sales
there. You didn't mention the timing of the equipment launch or
kind of equipment sales in Europe.
Could you go through the timing of I guess the launch that you
mentioned in the second quarter and what that did for your sales
in Europe?
John Miles: Yes. The 6.2% was the growth in Europe. It actually was driven
by consumables, not equipment - equipment including Cercon units,
Frank.
The item that you're talking about is the Orthoralix-9200 DDE,
which we showed at the IDS, took orders, and didn't ship until
the third quarter. And although that was a positive impact in
the third quarter, we ended the quarter with a significant
backlog because that unit is only manufactured at our plant in
Italy. And, of course, they don't work in the month of August.
So we frankly didn't have enough manufacturing capacity to clear
all the orders. And we will be clearing them all during the
fourth quarter.
Frank Pinkerton: Thank you. And then also I guess further updating on
Asia, do you expect for any other, I guess, inventory adjustments
in the channel there? Or is that a market that should be, I
guess, a little more consistent from a revenue standpoint going
forward? Thank you.
John Miles: I expect positive growth in the fourth quarter in Asia.
Frank Pinkerton: Thank you.
John Miles: Thank you, Frank.
Operator: Your next question comes from Jeff Gates from Gates Capital
Management.
Dax Vlassis: Yeah, this is actually Dax Vlassis. I've got a question for
Bret. Bret, can you review the $806 million in debt, you know,
focusing on the revolver balance as well as the amount shown on
the Euro bonds?
Bret Wise: Sure, I'd be glad to do that. The Euro bonds, you know, it's 350
million Euros at face value. And, you know, at today's exchange
rate - let's call it 1.16 - that's about $406 million face amount
of debt.
In addition to that we have about $200 million drawn on the
revolver that's in either Japanese yen or Swiss francs. And the
rest of the borrowings are private placements in either Japanese
yen or Swiss francs.
Dax Vlassis: Did some of the private placements come due this year? And do
you have - I guess the rest of the maturities would be - the $23
million in current would be the private placements?
Bret Wise: The $23 million in current is the private placement coming due
this year. Next year we have the same amount coming due again in
the fourth quarter. And then in early 2005 we have I think it's
about $65 million of other private placements coming due.
Dax Vlassis: Right. And you talked about use of free cash flow for both
acquisition and paying down debt. Can you talk about the current
pipeline for acquisitions? Thanks.
John Miles: Maybe I'll try and answer that one for you. You know that our
industry remains highly fragmented. And we have signaled our
intent to aggressively pursue acquisitions. And I guess all I
can add to that is we continue to engage in numerous
discussions. And I believe that ultimately that will lead to
further acquisitions hopefully sooner rather than later.
Operator: Your next question comes from Derek Leckow from Barrington
Research.
Derek Leckow: Yeah, good morning, and congratulations on a nice quarter.
John Miles: Thank you, Derek.
Derek Leckow: I've got a question here on the internal growth rate. John,
you gave us some statistics there on consumables versus
equipment. I believe you said 6% overall. Could you give us
that on a geographic basis as well?
John Miles: No, we don't break that out. What I said was in total the
dental-base business grew 4.1%, Derek.
Derek Leckow: Okay.
John Miles: Non-dental was negative .2%. Exchange was favorable 5.1%. And
acquisitions/divestitures was basically nothing.
What happened is our heavy equipment grew at very strong
double-digit levels. It was very strong in the quarter. But it
doesn't come across as very strong because that growth was really
offset by a decrease in the Cercon unit sales this quarter versus
the year previous. And what I indicated on consumables is that
in the United States and Europe combined they grew 6%. And I
would submit that's clearly in excess of market growth for those
two regions combined.
Derek Leckow: Okay. And then just what was the equipment figure then, if
you exclude the Cercon machines?
John Miles: Yeah, I'm not really willing to do that because I don't want to
help my competitors any more than I have to.
You can believe that heavy equipment was a very strong
double-digit.
Derek Leckow: Okay, good enough. Thanks.
John Miles: Maybe that'll help you with the math.
Derek Leckow: Yeah. The second question I have is regarding your cost of
goods sold. It seems to have risen here at a faster rate than
sales growth. What were some of the drivers in that figure?
Bret Wise: Derek, it's Bret Wise. The change from quarter-to-quarter 2002
to 2003 we saw about a 1-point drop in gross margins. And that's
driven more by the mix of business both geographically, the
regions they were coming in, and the product mix within those
regions rather than a increase in cost in any one particular
product. It's really a product mix both geographic and the
actual product that's caused that 1% drop in gross margins.
Derek Leckow: Okay.
John Miles: Yeah, maybe the other thing I'd add is you know that we're today
launching numerous new products and that new product launches are
how you improve gross margin as a percent of sales. And it just
turns out this year that the new products are coming in the
fourth quarter as compared to evenly throughout the year.
Derek Leckow: So on the whole then we should be expecting a nice increase
for '03 versus '02 on that?
John Miles: We would expect gross margin as a percent of sales will increase
in the fourth quarter, yes.
Derek Leckow: Then a question on your interest expense assumption for the
fourth quarter - thanks for all the color you've given on the
debt. Would that figure look similar to what you had in the
third quarter?
Bret Wise: It'll probably look slightly lower because the repayment of the
$47 million in debt that we repaid was at the beginning of
September. So we only had the benefit of that for one month out
of the quarter. That difference is not as big as you might think
because the amount of money we earn on cash is not terribly
different from the amount of interest we pay on the debt at this
point.
Derek Leckow: Okay.
Bret Wise: But there'll be a modest drop in net interest expense I would
think in the fourth quarter.
Derek Leckow: Okay great. And then just a question on the Department of
Justice case - maybe you could give us some more color there as
to what the Department of Justice - what is their key argument
here as to why the district court got it wrong?
John Miles: I need to be careful what I say I guess about the Department of
Justice. I think that they're still thinking about that. And
frankly, they had to file an appeal in order to hold the appeal
date open. In other words, had they not filed - they filed on
the very last day, Derek.
Derek Leckow: Okay.
John Miles: And what that does is it preserves their right of appeal. And
they don't really have to say anything ultimately until the Third
District Court comes to everybody and says now we want to really
get going on this case. So we're not really sure what the basis
of their appeal is. And I guess we'll learn that when time goes
forward.
Derek Leckow: And is it fair to say that at this point your legal costs
associated with that case have declined as a result of completing
the trial and so forth?
John Miles: Oh yeah, yeah, and even the appeal. I mean, you know, in an
appeals court there'll be no more testimony. It's in essence
legal theory arguments. So there won't be lots of witnesses and
lots of lawyers examining and cross-examining them. So the cost
of an appeal is significantly less than the cost of a case,
which, of course, over - what - the eight years that this has
been going on, was very high.
Derek Leckow: Right.
John Miles: But we're basically at the end of the road. We were really
happy. You know, the District Court's opinion was 160-page
document. So this was not some sort of flip answer. This was a
really meticulous well-reasoned answer. And I think that's going
to cause the Department of Justice lots of heartache at the
appeals level.
Derek Leckow: Okay. And it looks like you've allocated some funds here for
acquisitions in the near-term. In the event that those don't
materialize, do you have plans to acquire your own shares?
John Miles: I guess we'd have to make a decision. We today don't have an
authorization from the Board to repurchase shares. But frankly
that probably could be obtained pretty easily. It would be a
choice between paying down the debt or rebuying shares.
You know that in September we increased the dividend. And I
wouldn't look for that to change for at least another year. So
the choice will be buy back shares or pay down debt in the event
that there were no acquisitions. But I have to tell you, you
know, strategic profitable acquisitions absolutely will be our
first choice as to how to use this cash flow.
Derek Leckow: Okay. Thank you very much.
Operator: Your next question comes from Alan Mitrani from Cooper Beech
Capital.
Alan Mitrani: Hi. It's Copper Beech Capital. Thank you. Good job.
Can you talk a bit about how much of your sales went through
distribution versus how much did not go through distribution, how
much went direct?
John Miles: I have to be honest with you. We don't even calculate that, at
least not on a quarterly basis. On a rough basis we've indicated
that about 40% of our sales worldwide are direct to the dentist,
and about 60% goes through distribution. And what really
determines that is the technical complexity of the product. The
more technically complex the product, the more likely it is to be
sold direct. Dental implants is an example where you have a lot
of clinical discussions with the oral surgeon, as the product is
sold direct. My guess without having any statistics is that
ratio doesn't change much quarter-to-quarter.
Alan Mitrani: Okay. The reason I'm wondering - thank you. That's helpful.
And partly why I'm asking is also just wondering some of the
dental distributors seem to be making a push towards the end of
the year to get dentists who seem to be doing okay at least in
the US and Europe to spend money and to highlight new products.
I'm just wondering if the dental distributor channel saw greater
sales volume or greater taking of share as opposed to the direct
channel for you this quarter?
John Miles: I really wouldn't know that. I mean, we'll see when Patterson
and Schein report their most recent quarter how they performed.
I really don't know the answer to that question.
Alan Mitrani: Okay.
John Miles: My guess is I don't think so.
Alan Mitrani: Okay. That's fair. Thank you. I appreciate that.
Operator: Again I would like to remind everyone in order to ask a question
please press Star then the Number 1 on your telephone keypad.
We'll pause again for just a moment to compile the Q&A roster.
Your next question comes from Suey Wong from Robert Baird.
Suey Wong: Thank you. You guys have a lot of new products coming out in the
fourth quarter. Which ones do you believe have the highest
potential?
John Miles: I tried to kind of outline them in the announcement, Suey.
Certainly the new electric handpiece is an important new product
for us. We'll be launching at least two LED lights. That
clearly is a significant market segment that today we're not
competing in and I would say Sybron with their Dermatron light is
controlling. I guess I would say that, although each individual
product isn't that large, there's a whole slew of new products to
increase our output in the preventive area in terms of fluoride
foams, fluoride varnishes, fluoride rinse, different flavors of
NUPRO paste. You know about our disposable prophy angle launch,
Revolve, and also several new ultrasonic inserts. So there's a
whole slew of them. And I'd say the other kind of key new
product is the new surface treatment for our dental implant
systems, which is really where the marketing wars are being waged
in terms of dental implants these days.
And, you know, all of these, you know, will be rolling out over
the fourth quarter. The majority of them will at least be
previewed at the ADA, which is the big dental meeting coming up
this weekend. And we'll see sales as we go through the quarter.
Certainly all of them will provide a platform for growth in 2004.
Suey Wong: Good. One last question here - what is the EPS impact from
PracticeWorks for the fourth quarter?
John Miles: Well we said it was $5.8 million pre-tax. I see Bret is working
on it.
Bret Wise: It'd be about $.05 a share - between $.045 and $.05 a share
probably.
Suey Wong: Great. Okay, thank you.
John Miles: You're welcome.
Operator: Your next question comes from Chris Arndt from Select Equity
Group.
Chris Arndt: My question was answered. Thank you.
Operator: Thank you.
Your next question comes from Walter Landauer from Landauer
Capital Management.
Walter Landauer: Thanks for the good report. I'd like to get some color
on how the China and India geographic entity has fared in this
quarter. I recall that there was - the growth in Asia was very
material in the prior year.
John Miles: Yeah. Well obviously our growth in the third quarter in the
Asian region was a disappointment to us because it was negative
6.8%. Historically the Asian markets have been growing for us
about 15% positive.
In the first and second quarter of this year the dental demand
was sharply reduced because of the SARS crisis. But as I
indicated in my comments, in the first quarter of this year we
reported sales growth in Asia of 17%. So clearly our dealers,
who in that region of the world place orders well in advance,
didn't anticipate the impact of SARS. And we enjoyed good
growth. But, in fact, during that first quarter dental visits
were decreasing rapidly. And they clearly ended up with stronger
inventory positions than they wish to carry and in the third
quarter in essence burned those inventory positions down. So the
SARS crisis at this point is over. And as long as there's no new
outbreaks, I guess it's under control. And we would expect
positive growth to commence in Asia in this fourth quarter.
I mean, a lot of India and China is really about the future. And
while the markets are important, the markets are still small in
terms of world dental demand.
Walter Landauer: Is that outlook that it would likely increase that there
would be a material increase expected for next year in China and
India, or is this not foreseeable with that kind of precision?
John Miles: Well I don't know if I'd say an explosive increase. What I would
expect in 2004 is that the Asian region will go back to the types
of growth levels that it was enjoying pre-SARS. So I would say
strong double-digit growth should be expected, which clearly is
an improvement over what we will have achieved in 2003. But I
don't expect that it will double, or triple, or any of those
things just because of the numbers of people that live in those
countries. It's further away than that.
Walter Landauer: I'd like to have a follow-on question on the China
situation. Is there - there's no likelihood that the competition
from - that there will be significant competition from Chinese
companies that the Chinese government probably regards this as
not worth making a great fuss about. And the Chinese are very
nationalistic in their policies in the past. But now with
joining the International Trade.
John Miles: Yeah. There are today, Walter, very limited local Chinese dental
manufacturing competitors. And frankly the products that they
make, while they sell at very low pricing, are really quite
inferior from a quality standpoint.
You know that we have our own manufacturing facilities in China,
and in essence use Western technology in our plants, and make
significantly higher quality products. But, of course, we use
all Chinese management and labor. So we're able to compete price
wise in the country, not at the absolute bottom end, but at the
end where at a reasonable price people are willing to pay for
strong quality output.
Walter Landauer: Also a comment was made I think in the last part of the
conference call that the new panoramic digital X-ray system was
anticipated, and that was supposed to make it understandable that
we didn't get quite the sales we might have expected otherwise.
And my question is whether this period is over and we would - if
we can expect increased sales?
John Miles: Yeah, what I indicated is that we ended the - that unit, by the
way, is only manufactured in our plant in Italy. And we ended
the third quarter still with a significant backlog back order on
that new unit because, of course, in the month of August the
plant is shut down for Italian holidays. So we didn't have
enough manufacturing capacity in the third quarter to clear the
orders.
Walter Landauer: I see.
John Miles: But we will have enough manufacturing capacity in the fourth
quarter to not only clear the backlog but to service the new
incoming orders that we will receive. So we made headway, but it
would be fully resolved in the fourth quarter.
Walter Landauer: Do you keep any figure on the total backlog in the
quarter, that is all products?
John Miles: No, really we don't do that because generally back orders are
really very low. We ship basically without back orders, and we
ship as soon as the order comes in. So this particular unit is
kind of a unique thing.
Walter Landauer: I see. Thank you very much.
John Miles: Thank you, Walter.
Operator: Your next question comes from Greg Halter from LJR Great Lakes
Review.
Greg Halter: Good morning, guys - very good quarter.
John Miles: Thanks.
Greg Halter: John, I wonder if you could repeat the growth in the rest of the
world. I missed that figure.
John Miles: Yes, sir. I sure can , 1.7%. And my comment was that we had
solid growth in Canada that was offset by decreases in other
parts of the world.
Greg Halter: Okay. My second question is regarding the inventory build in
Europe. The dollar amount there. And I think you said four
days, if I'm not mistaken.
Gary Kunkle: It was $8.5 million, which is equivalent to four days across the
company.
Greg Halter: Okay. And you would expect that to revert back to more normal
figures after the quarter?
Gary Kunkle: After the first quarter - we will be burning that off primarily
during the first quarter. So you probably aren't going to see
any inventory improvement in the first quarter. And then
following that, when the transition is completed, we will renew
our efforts to try to reduce inventories around the world.
Greg Halter: Okay, great. Thank you.
Operator: There are no further questions at this time.
John Miles: Then to conclude our comments, thank you very much for your
support and interest in our company. And thank you for tuning in
today. We'll talk to you soon.
Operator: This concludes today's DENTSPLY International Third Quarter
Earnings Release conference call. You may now disconnect.
END