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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report February 7, 2007
(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.)
221 West Philadelphia Street, York, Pennsylvania 17405
(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Company's telephone number including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
_____ Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
_____ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
_____ Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
_____ Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 8.01. - Other Events.
The following information is furnished pursuant to Item 8.01, "Other Events."
On February 7, 2007, the Company conducted a conference call to discuss the
sales and earnings release for the fourth quarter and full year of 2006 that was
issued on February 6, 2007 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.
Item 9.01. - Financial Statements and Exhibits
(a) Financial Statements - Not applicable.
(b) Exhibits:
99.1 Transcript of the Company's conference call which it conducted on
February 7, 2007 related to the second quarter of 2006 sales and
earnings release issued February 6, 2007 as referenced in Item 8.01.
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/William R. Jellison
William R. Jellison
Senior Vice President and
Chief Financial Officer
Date: February 13, 2007
Ex99.1
Moderator: Bret Wise
February 7, 2007
7:30 a.m. CT
Operator: Good day everyone and welcome to today's DENTSPLY International
fourth quarter 2006 earnings release conference call. As a reminder, today's
call is being recorded.
For opening remarks and introductions, I would like to now turn the
call over to Mr. Bret Wise, Chairman and CEO of DENTSPLY. Please go
ahead, sir.
Bret Wise: Well, thank you, Debbie and good morning, everyone. Thank you for
joining us on our fourth-quarter and full-year 2006 earnings conference
call. This is Bret Wise and also with me today are Chris Clark, Our
Executive Vice President and Chief Operating Officer, and Bill
Jellison, our Senior Vice President and Chief Financial Officer.
I'd like to begin the call today with a few overview comments
regarding both the fourth quarter and the full year results, and then
I'll provide you with an update on two of our strategic initiatives
that we were implementing during the fourth quarter. Chris Clark's
going to follow my comments with an update on our new product pipeline,
and then Bill Jellison will take you through a more detailed review of
both our income statement, balance sheet, and also a few comments on
cash flows. And of course following our remarks we'll be glad to answer
any questions that you have.
But before we get started, it's important to note that this
conference call may include forward-looking statements involving risks
and uncertainties, and these should be considered in conjunction with
the risk factors and uncertainties described in the company's most
recent annual report on Form 10-KA, its subsequent quarterly reports on
Form 10-Q, and of course our press releases and conference call
transcripts all of which have been filed with the SEC. And this
conference call in its entirety will also be part of an 8-K filing that
will be available later this week on our Web site.
At this point, you should have received our earnings release for
both the fourth quarter and the full year 2006. If for any reason you
haven't received those, they are also available on our Web site.
So starting with the fourth quarter; our reported sales during the
quarter were 471.3 million and that's an increase of 5.4 percent
compared to the 2005 fourth quarter. And excluding precious metal
content, sales increased 5.3 percent for the quarter. This 5.3 percent
increase, excluding Precious Metals, was comprised of internal or
organic growth of 1.8 percent and foreign exchange of 3.5 percent.
The geographic breakdown on the internal growth for the quarter,
again excluding Precious Metals, was U.S. was lower by 5.5 percent,
Europe grew by 8.1 percent, and the balance of the world grew by 5.9
percent. The results reflect both the strategic initiatives that we
implemented in the fourth quarter in the U.S., but also the strength
and diversity of our product and geographic mix as strong growth abroad
offset the lower sales in the U.S. during fourth quarter.
Now, the total internal organic growth for the quarter of 1.8 was
really driven by three main factors. First, strong double-digit growth
in our orthodontics and implant product categories and also our ceramic
crown and bridge product that we call Cercon. Second, strong and
improving growth in our endodontics business. And, third, 19-percent
growth in Asia and a continued strong growth across all of our European
business units. And just to add one data point on Europe. In Germany,
our broad consumable and laboratory product lines grew 4.9 percent for
the quarter and 4.5 percent for the full year, I think reflecting a
substantial recovery from 2005 when changes in government reimbursement
drove a significant contraction in that market.
As expected and as shared with you on our calls in both September
and October, U.S. sales during the quarter were lower than the prior
year reflecting the short-term impact of our Chris Clark initiative in
the U.S., a shift towards end-user promotions versus dealer promotions
in the fourth quarter to drive recapture of share, and the price
increases implemented October 1 which drove some dealers to buy ahead
of those increases.
And as you'll recall, we did implement the Chris Clark initiative
at the beginning of the fourth quarter by reducing our dealer group to
28 strategic dealer partners from over 200 dealers that we had used
previously. And as we look at the data underlying our performance in
the fourth quarter, during this period of transition of the initiative,
there's a number of items to note.
First, our sales force is now working more than ever with our
continuing strategic dealer partners, and today we have systems in
place to enhance our ability to use more accurate data and have more
focused end-user sales and marketing programs. I'd say we're very deep
in the learning curve of using the new information and the sales tools
that we have, and we're beginning to make progress with those. We would
expect that progress to accelerate throughout the year.
Second, the impact on our internal sales growth performance in the U.S.
in the fourth quarter was essentially what we had expected going into
the initiative, reflecting the loss of replenishment to the
discontinued dealers, as well as an emphasis on the end-user
promotional activity in the fourth quarter, and again reduction in
dealer inventories following the October 1 price increases.
Third, the retail sales out of our continuing 28 dealers. So, our
products out of dealers' inventory to end-users was very strong in the
fourth quarter. In fact, the growth rate for the continuing dealer
group on a retail basis, although it was strong through the first nine
months of the year, increased substantially in the last three months of
the year and improved sequentially each month through the quarter. So
the data points we have, indicate that these continuing dealer partners
are rapidly capturing share during this transition.
And the last thing to note is that the discontinued dealers came
into the quarter with probably 60 to 90 days worth of inventory. We
don't know for sure or precisely how much that was. But we also
permitted them to buy up to 60 days worth of supplies during the
quarter throughout this transition. Some of the discontinued dealers
took advantage of that opportunity, particularly for high turnover
items. So, as we look at the end of the year dealer inventories, we
don't know for sure how much the discontinued dealers have, but they
likely have inventory that will carry some of them well into the first
quarter of 2007. However, given the performance and the progress shown
by our continuing dealer group, we would expect any impact on our
wholesale sales from the initiative to be slight or modest during the
first quarter.
So, all told, we're very pleased with the progress we made on this
initiative during the fourth quarter and also the significant success
demonstrated by our continuing dealer partners to recapture market
share that was at risk. And we now believe the implementation is
largely behind us as we enter 2007 and we should now begin to realize
the benefits.
Also during the fourth quarter, we completed the planning for, and
January 1, 2007 implemented the merger of our U.S. endodontics and
implant businesses. You may recall from our third-quarter call that our
strategy here is to leverage the strong product platforms we have in
both endodontics and implants to improve our ability to serve the full
life cycle of the tooth through one combined sales force. By the life
cycle of the tooth, we mean treating and preserving tooth structure
through an endodontics treatment where it's possible, and is in the
best interest of the patient, when it's no longer possible treating the
patient through a highly aesthetic implant procedure. Now, this is an
important strategic initiative for the Company and for our customers,
as the combination gives us more than 200 sales persons representing
one single sales bag, with the combined product offerings for these two
important dental disciplines. And in addition to a larger sales force,
the business is further strengthened by integrating marketing, clinical
education, and certain operating functions.
I think it's also important as it's a reflection of our strategic
thinking to leverage our capabilities and strengths across our
operating divisions or business units to create competitive advantages
for what's now a combined business, but in the event we don't merge
businesses to create competitive advantages against businesses that
operate separately.
Early indications from this initiative are that there's a real and
substantial demand for this package solution, and I attended the sales
force meeting to launch the combined business in the first week of
January and it was very obvious that we have a very excited and
motivated sales force to serve both markets, and we have high
confidence that this will generate improved results in 2007.
Looking at the full year 2006 sales results, our growth was 5.6
percent and 5.2 percent ex PM. And of this internal organic growth was
4.3 percent with the balance coming from currency translation and
acquisitions. The internal growth was driven by 7.4-percent growth in
Europe, 1.2-percent growth in the U.S., that was lowered by the effects
of the Strategic Initiative in the fourth quarter obviously, and the
rest of the world grew 5.6 percent for the full year. So again, I think
the breadth of our product mix and our geographic reach helped to
balance our growth performance for the full-year period.
We also saw significant gross margin and operating margin expansion
during the year reflecting our programs to improve operations and to
capture synergies among our business units, particularly those that
serve like specialties or like discipline of dentistry across different
geographies. We're very pleased that we finished the year at the high
end of our EPS guidance, despite significant investment that we had in
the two strategic initiatives I just mentioned. And overall, it was a
very strong year for our business and we're exiting the year with a lot
of momentum going into 2007. Accordingly as we look at 2007, we're
confident in guidance of accelerated internal growth in the range of
five to six percent for the full year. And we tend to believe we'll be
in the upper half of that range for the full-year period. And although
it's still very early in the year, our sales performance in January
supports this performance range.
On an earnings basis we expect diluted earnings per share for 2007
in the range of $1.56 to $1.61, reflecting once again double-digit
growth for profits in the upcoming year.
At this time, I'd like to turn the call over to Chris Clark, our
Chief Operating Officer, to provide an update on our new product
pipeline. Chris.
Chris Clark: Thank you, Bret and good morning, everyone. Thank you for
joining us on our call this morning. I'd like to take a few moments to
provide you an update on our innovation efforts and to highlight some
of our key new product introductions from the past year.
In 2006, we introduced approximately 30 new products as well as
many more product upgrades. This figure is slightly ahead of the
long-term target of 20 to 25 new product innovations a year.
Importantly, our innovation in 2006 was broadly distributed across our
operating franchises and it underscores the emphasis on new product
development in each of our business platforms.
A few highlights of new products introduced in 2006 include Innovation
C, our revolutionary new ceramic orthodontic bracket system. As Bret
indicated in the November call, this system combines the benefits of an
interactive bracket system with the strong aesthetics of ceramic
brackets. This product was introduced in the late third quarter and
customer reaction has been tremendously positive, necessitating
additional capacity investments, which is really a pleasant problem to
have.
I'd also like to comment on the continued success of the Cercon system,
our zirconia-based crown and bridge product line. As you may remember,
we expanded the system in 2006 with the addition of two new products.
First Cercon Art, which added true CAD/CAM capabilities for the design
of crown and bridge units, as well as Cercon Eye, which is a very
accurate desktop scanning system that can be used to transmit digital
data of an optically scanned model to either an installed Cercon unit
or to another site for production of the coping.
As a result of these and other innovations, our global Cercon
business continues to be a very solid growth platform and we've seen a
significant increase in sales of the Cercon consumable product in
approximately the 50-percent range in 2006.
In addition, we've introduced several new products since our last
conference call, and I'd like to highlight a couple of those. In the
restorative area, we introduced EsthetX Flow Compula. Flowable
composites are often used as the restorative material of choice for
smaller cavities. And this product continues our focus on improving
ease of use through packaging and delivery systems. It uses a single
unit dose cannula packaging to provide the benefit of more precise
dispensing of the EsthetX Flow composite. This saves the practitioner
both time and material.
Also in the restoratives area, we introduced Integrity TempGrip, which
is an addition to our temporary cement product line in the U.S.
Dentists use temporary cements to secure provisional restorations to
the tooth surface, and this product delivers superior handling and
performance characteristics and really positions us well in a product
category where traditionally we've been underweighted in terms of
market share.
In the Endodontics franchise, we introduced the VDW Silver tabletop
torque controlled micromotor. This system is used for root canal
preparations using Nickel Titanium instruments. This product provides
several enhanced features that are really designed to facilitate the
continued or ongoing conversion to Nickel Titanium endodontic systems,
including self-diagnostics and a simple intuitive control panel. More
importantly, as we look at our current inventory of innovation projects
we continue to have a full pipeline of new products that we anticipate
bringing to market in the next 12 months. We're going to be introducing
many of these products at most of the major dental shows throughout the
year.
Now, I'd like now to turn the call over to Bill Jellison, our Chief
Financial Officer, and Bill will review the financial results for the
quarter and the year in more detail. Bill.
Bill Jellison: Thanks, Chris. Good morning everyone. As Bret mentioned, net
sales for the fourth quarter of 2006 increased by 5.4 percent and
increased by 5.3 percent excluding Precious Metals. Net sales for the
full year were $1.81 billion, an increase of 5.6 percent over last
year, while sales ex Precious Metals were $1.62 billion, an increase of
5.2 percent for the year.
The impact of the U.S. Partnership Program change, earlier price
increases and the refocusing of merchandising efforts to end-users
negatively impacted internal sales growth for the year by slightly
under one percentage point.
The 2006 geographic mix of sales ex Precious Metals was as follows. The
U.S. represented 42 percent of sales, Europe was 38 percent this year,
and the rest of the world was 20 percent of sales. As expected, the
implementation of our U.S. Strategic Partnership program in the fourth
quarter lowered sales growth for both the quarter and full year.
However, we are confident that it will add value to our business as we
move into 2007 and beyond.
We are very pleased with the worldwide progress being made in a number
of our core businesses. Orthodontics delivered double-digit growth,
implants grew high teens, and our all ceramic Cercon product line grew
well above 20 percent for the year. Gross margins for the fourth
quarter were 52.7 percent, - that's ex Precious Metals, or higher by
1.3 percentage points compared to the fourth quarter of 2005.
Full year gross margins were 57.2 percent ex Precious Metals, an
increase of .9 percentage points over last year. Margin rates were
positively impacted in the quarter and for the year as product mix
improved, operational overhead continued to be leveraged, operational
efficiencies continued, and we realized cost savings from the
previously announced closing of our Pharma facility. SG&A expenses were
$159.5 million, or 37.9 percent of sales, ex previous metals in the
fourth quarter of 2006 versus 36 percent in the fourth quarter of 2005.
The higher expense level in the fourth quarter primarily resulted from
the expensing of stock options in 2006. If stock option expenses were
included in both periods, SG&A expenses would have been higher than
last year at .8 percent of sales ex Precious Metals.
As mentioned on our third quarter conference call, costs associated
with the recently announced Strategic Partnership program and the
merger of the endodontic and implant divisions increased expenses in
the current period. Total year SG&A was $606.4 million, or 37.4 percent
of sales, ex Precious Metals in 2006. SG&A expenses for the year were
would have been lower by .3 percent of sales ex Precious Metals in 2006
compared to 2005 if stock option expenses were included in both
periods.
Operating margins were 16.9 percent including restructuring
expenses in the fourth quarter of 2006. Operating margins were 18.9
percent on sales ex Precious Metals in the fourth quarter of 2006 and
-5.4 percent in the same period last year, including restructuring and
impairment charges. Operating margins ex Precious Metals on a non-GAAP
basis, excluding impairment and restructuring charges and including
stock option expenses in both periods, were 19.3 percent for the fourth
quarter of 2006, compared to 18.1 percent in the fourth quarter last
year. Full-year operating margins were 19.4 percent on sales ex
Precious Metals in 2006 and 4.7 percent in 2005. Operating margins on
sales ex Precious Metals on a non-GAAP basis, excluding impairment and
restructuring charges and including stock option expenses in both
periods, were 19.9 percent in 2006, compared to 18.5 percent last year,
or an increase of 140 basis points in 2006. This exceeded our earlier
guidance as we finished the year stronger than expected.
Also keep in mind that approximately half of this improvement came from
decision to sell our Pharma facility and outsource our dental
anesthetic products. Our targeted level of improvement in operating
margins, on average over the next few years is 30 to 50 basis points
per year. This improvement is expected to come from new products,
improved product mix, operating efficiencies and leveraged overhead
costs.
Net interest and other expense in the fourth quarter was $.6
million, or $2 million higher than last year's fourth quarter. Interest
expense was flat with last year in the quarter while FX transaction and
other expenses were each higher in the quarter. Net interest and other
income for the full year was only $43,000, which was an improvement of
$1.9 million from 2005. Net interest income was 1.7 million in 2006
compared to an expense of 8.8 million last year and was benefited in
the year by the net investment hedges utilizing the Japanese Yen and
Swiss Franc. The impact of foreign exchange transactions and other
items was a negative $3 million in 2006 versus a gain of nearly seven
million in 2005. The tax rate for the fourth quarter was 17.9 percent
compared to 96.4 percent in the fourth quarter of 2005. The full-year
tax rate in 2006 was 28.9 percent compared to 36.1 percent in 2005. The
2006 tax rate of 28.9 percent included an operational rate of 30.6
percent compared to 29 percent in 2005. The Company benefited from
various tax adjustments of $4.8 million in 2006 compared to $8.9
million of favorable adjustments in 2005. As you know, the accounting
treatment for tax contingency items results in the reporting of the
change in the period of resolution. Thus, these items can skew the
reported rate in any one period. The operational rate was primarily
higher in 2006 due to a higher mix of earnings from Germany in 2006
compare to 2005. We believe an operational tax rate of 30.5 to 31.5
percent is a reasonable estimate for 2007.
To better understand and follow some of the following comments, you
may want to look at the tables included in the press release. Net
income for the fourth quarter of 2006 was $65 million, or 42 cents per
share, compared to a net loss of $.7 million in the fourth quarter of
2005. Net income in the fourth quarter of 2006 includes the net of tax
impact of both expensing stock options of $3.6 million, or two cents
per diluted share, and of restructuring and other related items of $1
million, or one cent per diluted share. The fourth quarter of 2006 also
includes a net reduction to income tax expense of $8.8 million, or six
cents per diluted share, from tax-related adjustments, while the fourth
quarter of 2005 included a net of tax impact of $67.5 million, or 42
cents per diluted share, for impairment of intangible assets associated
with injectable anesthetic products and a net reduction of income tax
expense of $5.7 million, or four cents per diluted share, related to
tax adjustments.
On an adjusted basis, earnings excluding restructuring and other
related items and tax adjustments, but including the expensing of stock
options in both periods, which constitutes a non-GAAP measure, were
$57.1 million, or 37 cents per diluted share, in the fourth quarter of
200, compared to 55.7 million or 35 cents per diluted share, in the
fourth quarter of 2005. Diluted earnings per share in the fourth
quarter of 2006 was negatively impacted by approximately two cents per
share as expected for the investments made to support our strategic
initiatives that Bret mentioned earlier and the currency transaction
impact.
Net income for 2006 was $223.7 million, or $1.41 per diluted share.
The 2006 earnings included the following items. Net of tax impact of
expensing of stock options of $13.3 million was eight cents per diluted
share. Restructuring and other related items of $7.8 million, which is
$5 million after tax, or three cents per diluted share, and net
reduction of income tax expense of $4.8 million, or three cents per
diluted share, related to tax-related adjustments. The net income for
2005 was $45.4 million, or 28 cents per diluted share. The 2005 period
includes pre-tax impairment and restructuring charges primarily
associated with the injectable anesthetic facility and indefinite-lived
intangible assets of $232.8 million, which is $178.9 million after tax
or $1.10 per diluted share, net non-recurring benefits related to tax
reorganization and repatriation activities of $8.9 million, or five
cents per diluted.
Net income for comparability analysis, including stock option
expensing in both periods and excluding the other items noted above for
the years ending 2006 and 2005, which constitutes a non-GAAP measure,
were $224 million, or $1.42 per diluted share for 2006, compared to
$1.24 in 2005, an increase of 14.5 percent.
Now let's look at cash flow and a few of the balance sheet items.
Operating cash flow ended strong with $115 million generated in the
fourth quarter of 2006, and operating cash flows for the year were
approximately $275 million compared to $233 million in 2005, or an
increase of 18 percent. Capital expenditures were $51 million for the
year, yielding free cash flow, which is operating cash flow less
capital expenditures and dividends, of about $202 million for the year.
Depreciation and amortization for the year was $50.4 million, Capital
expenditures in 2007 are projected to be about $55 to $60 million with
depreciation and amortization expected to be in the $55 million range.
Inventory days ended the year at 96 days for 2006, or six days
higher than last year and two days lower than at the end of the third
quarter of 2006. Receivable days ended 2006 at 57 days compared to 63
days at the end of the third quarter of 2006 and the record low of 52
days at the end of 2005. The balance sheet is in a strong position at
the end of 2006. During the fourth quarter of 2006 we paid off our 350
million Euro bond primarily with cash. The year ended with $65 million
in cash and short-term investments compared to $434 million at the end
of 2005. Total debt was $370 million at the end of 2006 compared to
$682 million at the end of 2005, reflecting the retirement of the Euro
bond.
DENTSPLY repurchased 9.7 million shares for $294 million at an
average price of 30.32 cents in 2006. Based on the company's increased
authorization to maintain up to 14 million shares of Treasury stock, we
still have approximately three million available for repurchase.
That concludes our prepared remarks, and we'd be glad to answer any
questions that any of you may have at this time.
Operator: Thank you. Ladies and gentlemen, our question and answer session will
be conducted electronically. If you have a question, please press the
star key followed by the digit one on your touch-tone phone. We advise
if you are using a speakerphone to please disengage your mute function
to allow your signal to reach our equipment. Again, star one for your
questions at this time. We'll pause just a moment to assemble the
roster.
And, ladies and gentlemen, our first question today comes from Suey
Wong with Robert Baird.
Suey Wong: Thank you. Congrats on the quarter here and also the year.
Bret Wise: Thanks, Suey.
Suey Wong: I have three relatively quick questions here. With all the changes
you've made in the U.S., when do you expect the business trends to
normalize here with the sell-through being similar to historical
patterns?
Bret Wise: Suey, I think that, as we look at the data points that we have
related to the Strategic Partnership program, we really think that a
big part of the transition happened in the fourth quarter. There may be
some lingering effect in the first quarter, but we would expect to have
pretty good U.S. sales in the first quarter, maybe close to a
normalized sales level. If there's any down side to that, we would
expect it to be modest.
On the endodontics and implant merger, we did the training for the
sales force in the fourth, where we went from a sales force of about
150-plus for endodontics and 30 to 40-plus for implants, to a combined
sales force of about 200. So, everyone essentially learned a new
discipline of dentistry in that sales force. Their uptake on selling
the combined bag will be gradual and it'll take place throughout the
year. So, at this point, I don't see any negative implications from
that, only positive implications that should grow throughout the year.
Suey Wong: Good, good. Turning to Germany here. It looks like the rebound in
Germany continues. But, could you give us an outlook
for Germany, breaking out the regular general dental business and
also lab business for 2007?
Bret Wise: Well, we don't usually project businesses at that level, at least
not publicly. Of course, we do internally. But, you know, if you look
at the lab business, which took the biggest shock in 2005 with the
change in reimbursement, it contracted pretty significantly in 2005. As
we entered this year we expected to grow, but to kind of grow from a
new baseline, a lower baseline, and grow modestly coming out of the
2005 year. In 2006, that's basically what we saw. We saw low-to-mid
single digits-growth of the lab business in Germany.
I would say with the precious metal prices where they're at an all-time
high. It's putting a lot of pressure on precious metal alloys. So those
sales are being depressed. But what's compensating that for us is the
Cercon product, which is growing rapidly. And essentially what's
happening with our mix is we're shifting from a large precious metal
base to a small, but growing ceramic base, Cercon, based on Zirconia
technology. And I would expect those trends to continue for the future.
The consumable business, although it was depressed in 2005, it
wasn't depressed to the extent of the lab business, and it had a pretty
good year in 2006, and we would expect that to continue in 2007. So,
you know, although it's too early to tell, our own interpretation of
the data that we have is that we're going to see more normalized growth
rate in Germany in 2007 and going forward.
Suey Wong: Bret, is there anything on the legislative front that could change
reimbursement again this year?
Bret Wise: Well, there's always talk. There's more talk about medical than
dental on the legislative front. But, Germany continues to run at a
deficit. And we don't know of any specific proposals that would
significantly affect dental. But that's always possible as they look at
their deficit and they try to decide what to do. I mean, given the fact
that they just made a major change in 2005 I would not expect one in
the near-term as we go forward.
Suey Wong: OK. Also, could you give us an update on the lab over in China?
Bret Wise: Oh, sure. For those on the call, early in 2006 we acquired a lab
in China. And you might recall that our business model there was to
serve our U.S. lab customers by providing them with either copings or
finished crowns that they could supply to their customers in the U.S.
The ground rules we set for that was only our labs that bought our
traditional products could use that service and that we don't sell that
product direct to the dentists in any way. The value proposition for
our U.S. labs was it created a way for them to compete with offshore
labs that were selling direct to dentists in the U.S. And the benefit
of our service in particular was the fact that we guaranteed the
materials used in the product, we guaranteed the fit, we guaranteed the
service. So it's a way for our U.S. lab customers to access that
offshore production unit without having to worry about the material
content or the fit.
As we noted on early calls, we've continued to add capacity in that
business as customers demanded throughout the year. I would say
sequentially throughout the year we were increasing the business almost
every month and setting new production records every month. We've
continued to add capacity to that business unit, but, you know, and all
things considered, it's still a relatively small business unit for us.
And it's really there to be used by our U.S. lab customers and is
driven by their demand. So I think it's going well. It's kind of going
as planned. And we continue to see more and more U.S. labs using the
service, including many of the labs that resisted it at the outset when
we announced it a year ago.
Suey Wong: Excellent. Thank you very much.
Bret Wise: OK, thanks.
Operator: Our next question is from Anthony Ostrea, with JMP Securities.
Anthony Ostrea: Hi. Good morning, guys and congratulations on a good quarter.
Anthony Ostrea: A couple of questions here. One, Bret, I think you spoke in
your prepared comments about pretty robust end-user sales force the 28
retained U.S. dealers in Q4. Can you kind of quantify that number and
maybe give the Q4 versus the first nine months number?
Bret Wise: I'm a little hesitant to do that, Anthony, because, you know,
there's a lot of moving parts in that data, including the number of
selling days for each dealer, etc. But what we are willing to say is
that, of course, these 28 dealers as a group were our fastest growing
dealer group going into the initiative, and they grew at or above
market going into the initiative. And we were very pleased to see that
their growth accelerated in each month, October, November, December and
ended very strong for the year. So it's evidence to us of two things.
One, that those continuing strategic dealer partners are really
aggressively going after the market share that was freed up by the
initiative, and that that's been supported by our end-user promotional
campaigns to try to convert that end-user sales over to them.
Anthony Ostrea: OK, and then sticking with the U.S. dealer program, does your
systems allow you to see or maybe quantify any fallout from end-users
in terms of purchasing DENTSPLY products?
Chris Clark: Yes, Anthony. This is Chris. The data that we receive obviously
is from the continuing distributors. So we are receiving and have
historical data at a transactional level going back for their
customers. Obviously we don't have visibility to the customers for the
non-continuing distributors. So as such, no, we would not really have
access to the data you're inquiring about.
Anthony Ostrea: Let me ask the question a little differently. If you take the
increase, more or less, in sales from the 28 against what you would
consider normalized sales levels, would you say that the impact from
that new program is pretty de minimis?
Chris Clark: No, I guess I would say, as Bret mentioned, it's indicative that
we're seeing them gathering additional customers. And I think one key
thing to keep in mind is that the average dentist buys from more than
one distributor. So, in many cases, if they were buying from a
discontinued distributor previously to us implementing the program,
Anthony, they were also buying most likely from at least one of our
continuing distributors, as well. So, in that case it would show up
through the transactional data as additional sales or sales growth for
an existing customer with one of our continuing distributors. And that
is, in fact, what we're seeing.
Anthony Ostrea: OK. And maybe it's too early, but are you able to give us some
examples as to how you're able to monetize that end-user data that you
are now receiving from the 28?
Chris Clark: I'm sorry. How we're able to...?
Anthony Ostrea: ... monetize that end-user data or maybe shift around marketing
programs.
Chris Clark: Absolutely. With that transactional data - let me talk first on
the sales side and then I'll talk on the marketing side. On the sales
side it really enables our sales reps to have the visibility, first in
terms of who are the right customers to be calling on. Secondly,
candidly, what is the right time to call on them? Was there a brand
conversion, did someone move away from our brands? And thirdly, we can
know what they're buying and what they're not buying, so we can custom
tailor our message much more effectively. A lot of our sales training
of our sales organization with this data has focused in on those
concepts. And again, as Bret mentioned, I think we're getting better
with utilizing that data every day.
On the marketing side, with the transactional data we're able to
use much more of a targeted or rifle-shot approach, going after the
right people with the right message at the right time. Our marketing
organizations have really strongly embraced the transactional data and
have put together a series of campaigns, programs, and promotional
approaches that are very different from historically what we've done.
And we're very excited about the preliminary results of that. And
again, I think this is a case where we're going to continue to get
better and more effective with this as we move on. We're in the early
days, but I would say it's encouraging.
Anthony Ostrea: Great, and then the last question before I move back in the
queue here. Just on '07 guidance here. I just wanted to make sure I
understand it correctly. Are you guiding to five to six percent organic
growth in '07?
Bret Wise: Yes, Anthony, that's right. We call it internal or organic growth of
five to six percent for the full year 2007.
Anthony Ostrea: Can you also comment maybe on gross margin and operating margin
expansion?
Bret Wise: We really don't talk specifically about that for the year. It's
just in our earnings guidance that we've given, Anthony. What we state
really around the operating margin area is that we're comfortable with
a 30 to 50 basis point improvement on average over a the next three to
five years.
Anthony Ostrea: OK, great. Thank you very much, and congratulations again.
Operator: Our next question is from Steven Postal with Lehman Brothers.
Steven Postal: Thanks a lot and good morning.
Steven Postal: Could you maybe elaborate on Europe? I know you mentioned some
detail about Germany. But with some of the other
countries, can you just elaborate on trends there?
Bret Wise: Well overall, we've seen very strong growth in Europe throughout
the year. And the fact of the matter is in the fourth quarter, for
instance, in all of Europe, we grew 8.1 percent and I added the data
point on Germany just because it's been a discussion point that people
have wanted to know. In Germany we grew those businesses 4.5 percent.
So, it's indicative of the rest of Europe was growing even stronger
than that 8.1 percent rate and we've seen very good performance
throughout the region in all - throughout 2006.
Steven Postal: And it seems like your gaining share in orthodontics. You know,
if that's the case, what would you attribute the growth of the business
to? Would it be a pickup in the market, new products, or just improved
sales execution?
Bret Wise: I think a couple things for us in orthodontics. One is that we've
had a very successful series of new product launches, including several
new bracket series that were launched over the last 12 months. We had
Innovation L, which is a lingual bracket. We had Innovation C, which
Chris talked about today. And, if you go back to the base product in
that Innovation series, we had Innovation R that was now launched about
two years ago, which is a self-ligating bracket, meaning it's an active
bracket. The bracket holds the wire and it can move teeth faster. And
that product has been hugely successful. So that is some of the newer
products we added.
We added the Rain Tree plastic sheeting, which has been very successful
for us. And on top of that, we have just a terrific sales force that's
been able to grow that business above market for many years in a row.
So, I think part of it is good new products coming to the market and
part of it's just tremendous sales force execution.
Steven Postal: OK. And then I know it's asked every quarter and sometimes it's
really out of your control, but can you speak to the
acquisition environment and how you view uses of cash in '07?
Bret Wise: Sure. And, you know, there's always timing risks when you're
talking about acquisitions. So with that caveat, one of the things we
did at the beginning of this year is we added new internal resources
that are dedicated to business development. And, we did that because we
want more networking in the industry; we want a more active program. We
had good resources devoted to it before, but we just added more breadth
to the resources that are active in that area. I think it's important
to note that for us acquisitions means more than just acquiring
businesses. It can mean gaining access to a product line through
licensing, it can be a joint R&D or a marketing venture, it can be a
minority interest in a business rather than a majority, or it could be
a traditional acquisition. So we continue to believe that there are
ample opportunities to grow the business by acquisition. And we would
expect to participate in industry consolidation going forward. However,
with that caveat I would say our process and our activities are at a
very high level, yet there's always timing risks to getting deals done.
Steven Postal: OK, and then just a final question for me. Bret, you kind of
just alluded to it, I guess, when you were talking about the internal
resources - or adding internal resources for business development. But,
you assumed the CEO role at the beginning of this year. Can you maybe
speak to what some of your priorities will be as you assume that new
position?
Bret Wise: Sure, I'll be glad to. And, you know, a lot of these aren't new,
because I've been part of the senior management team here for a number
of years and part of the strategy we've developed. But, some of the
things we're focusing very closely on are in the innovation area. We're
looking at developing a series of product lines for all market,
including some lower-cost product lines for the developing markets. We
see tremendous demand emerging in that part of the world. And it's the
market's kind of bifurcating. Part of the market is just coming into
enough wealth to have good oral health, and those people need low-cost
solutions that can retain tooth structure and improve their overall
oral health, which relates to medical health as well. And then we see a
portion of the population that's really driven towards our highest
aesthetic products. So, in our R&D ventures we're very focused on
covering both segments of the market, both in the developed world and
the developing world.
Another thing we're doing is focusing on how we can create a
competitive advantage across our platforms by sharing resources,
sharing R&D, sharing marketing, sharing sales forces. Some of the
things we talked about today were indicative of that. And the third
thing we're doing is continuing to focus very much on how to leverage
cost across our divisions. And you'll see that from time to time when
we have small restructuring charges, that's usually where we're
consolidating two divisions or two production facilities. And we're
looking to generate those operating improvements both to grow earnings,
the 30-50 basis points a year that Bill mentioned, but also to free up
additional funds to fund growth initiatives. So it's for both reasons.
Those are three of the priorities that the senior team's very
focused on. I wouldn't say those were all new. I think they're just a
continuation and a growth of strategies that we've been developing over
a number of years.
Steven Postal: OK, thanks so much.
Bret Wise: Thank you.
Operator: And our next question is from David Veal with Morgan Stanley.
David Veal: Hi, thanks. Most of my questions have been answered. I'm just
wondering with respect to the '07, can you talk about seasonality? Once
upon a time the back half tended to be more than 50 percent of the
earnings. Can you talk about your outlook there? And also maybe the
outlook for Cap ex and Tax rate?
Bret Wise: OK. I'd like to start this and then Bill, I think, will have more
specifics. But just on the seasonality issue. Typically our fourth
quarter is strongest, our second quarter is the next strongest, first
quarter is the third strongest, and the weakest quarter is generally
the third quarter, primarily because European business really slows
down during that period. So I would expect that seasonality to hold for
2007. The only caveats that I would have, if any at all, would be in
the first quarter. We still wonder whether there will be some modest or
slight impact from the final stages of the implementation of the U.S.
Partnership Program. But if there are, again we would expect them to be
modest. So I think you'll see that same seasonality that you've seen
for several years from us.
And Bill, do you want to comment on those other more specific
comments?
Bill Jellison: Yes, I think that we feel pretty good about the entire year
at this point. But, one of the things that we stated, especially as you
look at the fourth quarter impact from 2006, is that we would expect
the fourth quarter this year, besides the seasonality impact to be a
little bit stronger than it typically would. But, for the entire year,
I think we're feeling good about our expectations and really about each
one of the different business franchise areas that we've got and what
the expectations for each of them are.
David Veal: And, any outlook for Tax rate and Cap ex?
Bill Jellison: Tax rate I had mentioned in the comments. We're expecting
about 30.5 to 31.5 percent for the operational tax rate in '07 and from
a Cap ex perspective, $55 to $60 million with depreciation and
amortization falling in the 55-ish range.
David Veal: Great. Thanks much.
Bill Jellison: You bet.
Operator: And our next question is from Greg Halter at Great Lakes Review.
Greg Halter: Good morning, guys.
Bret Wise: Good morning, Greg.
Greg Halter: I wonder if you could comment on the R&D side and what that would
be or normally is as a percentage of sales.
Bret Wise: Sure, I'd be glad to do that. R&D for us, by the way, is made up
of two components, one of which gets reported as R&D expense and the
other which gets reported as license fees up in cost of goods sold. So
as you look at our R&D overall, it generally runs in the 2.7 to
three-percent range of sales XPM. And that's for the internal
development costs. The other cost, which is up in licensing fees and in
cost of goods sold, can typically run one to 1.5 percent. So, I would
say our R&D runs us 4.5 percent. In all of '06 I think our reported R&D
expense came in at the 2.7-2.8-percent range, kind of in the range that
I mentioned earlier.
Greg Halter: OK, great. And given the renewal of the R&D tax credit, did you
have any benefit from that in the fourth quarter, and do you expect any
in 2007?
Bill Jellison: We get some benefits from that, but there's not really much
of an impact additional kind of year-over-year basis between the two.
But, based off of that, we're constantly investing in R&D and we try to
utilize those as much as we can.
Greg Halter: OK. And 3M has introduced a product and I think it's called
Lava Digital Dentistry System for crowns and bridges. And just wondered
if you could comment on if you've seen that or what your thoughts are
regarding that product.
Bret Wise: Well, that product's been on the market for several years. I
don't think that's a new product. It's a product, for instance, that
would compete with our Cercon product, although the equipment
investment I think is substantially higher than it would be for Cercon.
It's just one of the competing products we have in that category. I
don't think it's, you know, really any better or any worse than any
others. 3M's a very good company, they're very innovative, and they
come out with good products. But other than that I really don't have
anything more to comment on it.
Greg Halter: OK. And I know you had a derivative position that I believe was
used hedging the debt. Is that totally eliminated now?
Bill Jellison: No, I think that it's actually one of our general strategic
advantages. Because of the asset-base that we have on a geographic
basis around the world, that allows us to do some beneficial
structuring with our debt. And we should continue in 2007 to benefit
from those activities.
Greg Halter: Was that an asset or a liability in the - December 31? And by how
much?
Bill Jellison: The specific derivative on it from the swaps was actually a
liability at the end of the year versus a benefit. But, keep in mind
that the movement of the derivative is in the opposite direction of the
movement in the underlying assets and equity.
Greg Halter: OK, and you may have touched on this earlier, but tegarding
uses of cash, just looking at the prospects for the dividend, as well
as share repurchase given, that you have three million to buy and
you've bought almost 10 million in 2006. Just wondered what the
prospects are on the share repurchase going above that three million
left to buy side of things.
Bret Wise: Well, I think our priorities for cash are reinvestment in the
business for growth. That's either through traditional acquisitions or
through internal means. Secondly, we do have the share buy-back
program. And last year, we had a large amount of share buy-backs. I
wouldn't expect us to get to that level this year, but we do have the
three million share authorization which is open. And I would expect us
to be using that to some extent during the year. And the third priority
would be dividends. And as you know, we increased the dividend 14
percent in September, and our policy has been to kind of increase the
dividend in line with earnings growth. And we usually look at that in
the third quarter of each year. So I would expect us to continue to do
that.
Greg Halter: OK, great. Thank you and congratulations on the very fine
results.
Operator: And, ladies and gentlemen, just a reminder, it is star one if you
have a question today.
We'll go now to Jim Lane, Tripoint Asset Management.
Jim Lane: My questions were asked - were actually answered. Thank you.
Bret Wise: OK, thank you.
Operator: Ladies and gentlemen, a final opportunity. Star one for your
questions at this time. Having no further questions in
queue, I'd like to turn it back to Mr. Wise for closing remarks.
Bret Wise: OK, thank you, Debbie. Again, we're very pleased with the
progress that we made in 2006 and we're entering 2007 with a lot of
momentum. We thank you again for your interest in DENTSPLY and we look
forward to speaking with you throughout the year as the year
progresses. Thank you and good-bye.
Operator: Ladies and gentlemen, thank you for participation in our conference.
This does conclude the call, and you may now disconnect.