DENTSPLY International Q4 2008 Earnings Call Transcript

Feb. 5.09 | About: DENTSPLY International (XRAY)

DENTSPLY International (NASDAQ:XRAY)

Q4 2008 Earnings Call.

February 05, 2009 8:30 a.m. ET

Executives

Bret Wise – President, Chairman, and CEO

Chris Clark – EVP and COO

Bill Jellison – SVP and CFO

Analysts

Derek Leckow – Barrington Research

Jon Wood – Banc of America Securities

Jeff Johnson – Robert W. Baird

[Bentic M – Aerovena]

[Chrisman Bogan] – MTB Investment

Adam Pusard – Barclays Capital

Operator

Good day, and welcome to the DENTSPLY International Fourth Quarter and Full-Year 2008 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Bret Wise, Chairman, and Chief Executive Officer. Please go ahead sir.

Bret Wise

Okay. Thank you, Colleen, good morning everyone. Thanks for joining us on our year-end conference call. This is Bret Wise, Chairman and Chief Executive Officer and also with us today are Chris Clark, our President and Chief Operating Officer; and Bill Jolleson, our Senior Vice President and Chief Financial Officer.

I'd like to begin today's call with some overview comments about our results for both the fourth quarter and full-year, and also provide some insight into where we see the state of global dental market.

Chris Clark will then follow with some insights into our approach for cost containment while still funding growth initiatives given the economic environment. And Bill Jolleson will then provide some more detailed insights into our financial results. And of course following our prepared remarks, we will be glad to take any questions that you may have.

Before we get started, it's important to note that this conference call will include forward-looking statements involving risks and uncertainties. These should be considered in connection with the risk and uncertainties described in the company's most recent annual report, on form 10-K, our periodic reports on form 10-Q, our press releases and other filings with the SEC. And recording this conference call in its entirety will be available on our website.

Last night, we announced fourth quarter and full year results for 2008. As noted in the release, fourth quarter sales decline 6.2% on a GAAP reporting basis, and 4.5% excluding precious metals.

This decline in sales in the quarter was greatly influenced by the strengthening of US dollar, which resulted in a negative impact from currency translation of 4.5% where essentially the entire decline measured on an ex-precious metal basis.

In addition, internal growth was negative 1.3% in the quarter, driven by slower activity in the US while acquisitions added 1.3%. So, constant currency growth for the quarter was essentially flat.

The credit prices and the recessionary economic conditions particularly in the US and to a lesser degree in Europe, contribute to notable slowing and dental activity in the fourth quarter, both for our share side consumable business and our specialty products.

The geographic breakdown for internal growth ex-precious metals was US contracted 12.8%, Europe grew 3.9% and the rest of the world grew 8.3%. In the US, our performance was influenced by number of factors, some of which are specific to our own circumstances and some which were market-driven.

With respect to the company-specific issues, you may recall that in our third quarter call, we noted that have suffered an outage at that time of our injectable anesthetic product for our US market due to manufacturing issues at our supplier, and that in fact we might not have product available for the fourth quarter.

That in fact did happen. We were essentially out of the market for the complete fourth quarter. We did began to get supply very late in the quarter, and in January and expect to have supply in Q1, although we would expect some lingering effects of the outage early here in 2009.

The second matter is that on October 1, going in to the quarter we implemented price increases for our products to go to the dealer channel. As these price increases were higher than we have had in previous years, we did see an increased level of price increase pre-buy activity in September resulting in higher dealer inventories coming into the quarter.

Above two factors combined with the efforts of, both end-users meaningful dentist and dealers to reduce inventories at this financial crisis emerged and consumer activity dropped off resulting in a rather significant liquidation of our products from the channel in fourth quarter.

Absent these two factors, we do believe that US performance would have been negative still probably in the mid single-digit range, and our sense is that the US market at retail probably contracted similar to our adjusted results here.

On a full world basis, as I mentioned previously our internal growth was negative 1.3% and adjusted for the two factors subscribed here, we probably would have been positive in that same range.

Overall growth remains more robust in Europe during the quarter where we grew 3.9%. And although this is slower than we have seen earlier in the year, we still see reasonable levels of demand in many regions in Europe as it appears that the global financial crisis has had less of an impact on dental procedures in Europe than what we initially saw in the US.

Our rest of world grew 8.3%, and remained robust in many of regions, particularly Asia-Pacific, Brazil and Middle East, Africa where we continue to experience double-digit internal growth. We did see some slowing in certain regions throughout the world, particularly Japan which was negative in the quarter.

Moving to earnings, our performance in the fourth quarter was driven by margin expansion, both at the gross margin line, which was up over 200 basis points and to a lesser degree at the operating margin line.

During the quarter, we did implement certain reductions or cost containment initiative and mostly driven towards discretionary spending. This combined with the continued mix improvement and the price increases implemented October 1, allowed us to exceed our margin improvement goals by reporting operating margin expansion of 60 basis points in, both the fourth quarter and for the full year of 2008 on a non-GAAP basis. And Chris and Bill will speak to this more in their comments.

So despite the contraction in sales in the quarter, earnings per share for the fourth quarter improved 4.4% on a GAAP basis and 2.3% on a non-GAAP basis. For the full year, I believe, we had a very successful 2008 including sales growth of 9.6% ex-precious metals, a 3.8%, which point of which was internal growth.

Our acquisition growth was 2.1% for the full year, so on a constant currency basis or constant currency growth for the full year was approximately 6%. Our EPS growth for the full year was up 11.3% on a GAAP basis and 13.3% on a non-GAAP basis. So, all told I think it was a very good year, particularly given the environment we are operating in particularly late in the year.

In addition, we completed four acquisitions during the year. Two regional expansions of our sales and marketing reach, one new technology for implant supported bridge work and dentures. And finally, ZHERMACK, which closed on December 31st.

The ZHERMACK transaction adds production synergies and restorative and infection control in Europe for us. Also give us access to certain markets that we were previously underdeveloped in. And it also provides us with a strong technical center for silicon-based polymers. The acquisition completed in 2008 should bring us an additional 4% to 5% growth constant currency in 2009.

Further we have very strong balance sheet, ample liquidity, good cash flow generation, so we are very well positioned to take advantage of opportunities that may arise. both for organic growth and acquisition.

Given the lack of liquidity from other sources in the market, the M&A climate may improve for us in 2009 and we are very prepared to take advantage of those opportunities should they arise.

Looking forward, we found numerous government banks or independent projections of economic activity throughout our markets. At this time, estimates for economic growth vary, but directionally there seems to be a consensus that were likely to see a contraction in the overall economy in the developed markets of the world next year. And of course those markets represent about 80% of our mix.

In addition, there has been numerous surveys conducted of end user dental demand most of which have been in the US. And although the results of these projections surveys also vary, there does appear to be a consensus that dental office visits have slowed and that there has been some downgrading of sorts of the procedure mix in favor of lower cost alternatives.

So accordingly, our view is that dental demand has and will slow as economic activity drops off. But as in the past, dental should continue to perform slightly better than the overall economy.

Our planning at this point assumes that developed country dental markets will have a flattish development next year to slightly positive for all of 2009. While developing dental markets, we believe, will continue to grow but at more modest pace than we saw in 2008, probably in the low to mid-single digit range.

We believe the growth will be lower in the first half of the year as the first half of 2008 was really quite robust, but may improve slightly in the back half of the year, as some developed countries begin to stabilize and show growth and consumer confidence comes back, added in part by the heavy stimulus package that we see being introduced.

Our sales and earnings outlook for 2009 is greatly influence by the currency exchange rates and the uncertainty surrounding, both economic activity and currency rate movements, internal sales growth is very difficult to predict at this point, and we have chosen not to give a specific guidance for the year at this point.

But we continue to believe that dentistry will perform better than the overall economy, and we should be able to continue to take share. As previously stated, our acquisition growth should be in 4% to 5% range for 2009 and currency at the current exchange rates will be negative 5% to 7%.

Our current expectations are that earnings will also be under some pressure due to slower market growth and adverse currency translation impacts. Accordingly, our current estimate is for earnings per share to be in the $1.85 to $1.95 range next year with the midpoint reflecting slight earnings growth over 2008.

Our guidance reflects our belief that economic activity will not improve significantly until midyear. And accordingly, we expect our growth in both sales and earnings to be backend loaded towards the last half of year.

Obviously, there is a number of assumptions in our guidance here probably many more assumptions than usual, and those may changes as we work our way through the year. So we will update you on this guidance of each quarterly call as we move throughout 2009.

At this time I would like to turn the call over to Chris Clark, who will give you some more insights into our cost containment efforts, our growth initiatives and where we see the greatest opportunities for growth in the near-term. Chris?

Chris Clark

Thank you, Bret. Good morning, everyone. I would like to take a few moments and give you some insight into two areas. First, the approach we are taking from a cost containment standpoint, and then key growth opportunities that we see even in the current economic environment.

On the cost containment side, our businesses are focused on ensuring that they create and maintain operating and financial flexibility through tightened for over both fixed and variable cost despite the uncertain economic climate we are currently operating in. Our approach to this is, both general across our businesses and also specific to individual business units.

From a general standpoint, we have deferred salary increases across our global salary workforce, including a wage freeze for our officers. All of our businesses are closely monitoring discretionary spending including delay in non-essential travel in lower priority programs.

From a fixed cost perspective, we are taking a very pragmatic business-specific approach. While all of our businesses are closely monitoring fixed cost including headcount, businesses that are more heavily impacted by the current economic climate are taking a cascading approach in this area identifying any short-term reductions that are appropriate and also identifying downstream contingency options that they can implement, should the situation wants.

Any actions, will likely be minimal in the areas of sales representation and research and development, and this approach really allows us to address the need for flexibility during the period, but also ensure that we maintain focus and support on strategic growth areas and initiatives both now and in the future.

To that end, I would like to take a moment and highlight some of the key growth areas or opportunities in this market, including some areas where we are particularly well positioned in the current economic climate.

We have a number of product lines that are designed to help our customers to reduce their cost structures, including in some cases their fixed cost, which is particularly important now.

For example in our centralized manufacturing capabilities in the prosthetics area, we are supporting the desire of our lab customers to reduce their fixed cost structures. We believe that were very well positioned in this area with our current range of services along with several new products that we are going be introducing later this quarter.

In addition, we believe the recent acquisitions and partnerships with both Fulton and ZHERMACK will be particularly beneficial in this economic environment given the fact that both these companies offer a wide range of value position products in their portfolios. We see the Fulton and ZHERMACK brands is providing platforms for additional value-oriented products downstream, and were pursuing several strategies to that end.

On a geographic basis, we see some markets as particular growth opportunity in the current environment. We continue to experience solid growth in key developing regions as Bret mentioned, including growth of approximately 20% in both Asia and CIS in Q4 and north of that figure in the Middle East.

While obviously, many of these economics are also slowing compared to previous growth rates, we believe that the investments we have made in these regions, particularly in the area of expanding our sales force position us to continue to grow well in excess to market.

We anticipate that these regions will continue to be highly accretive to our overall growth rate throughout 2009 and we are actually continuing to make an ongoing investments and additional sales representation, in particular in many of these regions as well in a handful of other businesses.

We also believe the current environment provides an opportunity to make appropriate targeted investments that position the business for more rapid growth if the underlying economic conditions improve on the backend of the recession.

One key example is our first US implant symposium for key leaders which we have scheduled for this June. We continue to view the US implant market as a really key long-term growth opportunity for us. And this event combined with the US introduction of our unique ANKYLOS CX implant and above met design should really help provide a platform to continue to grow at above market rate that are accretive to our overall business.

I would like to now turn the call over to Bill Jellison, our Chief Financial Officer to discuss the Q4 and the full year financial results in greater detail. Bill?

Bill Jellison

Thanks Chris. Good morning everyone. The high level of volatility, both in the global economic and foreign exchange markets during the fourth quarter resulted in a significant negative impact on our business.

We were especially impacted by the rapid slowdown of the global economy and the corresponding impact on the dental industry along with the negative foreign exchange rate volatility, which impacted the translation of our sales and earnings.

As Bret mentioned, net sales for the fourth quarter of 2008 decreased by 6.2% and sales excluding precious metals decreased 4.5% in the quarter with internal growth, a negative 1.3% in the period. Net sales for the full year were $2.2 billion, an increase of 9.1% over last year, while ex-precious metals were $1.99 billion, an increase of 9.6% for the year.

The 2008 geographic mix of sales of ex-precious metals was as follows. The US represented 38% of sales, Europe was 41% this year and the rest of the world was 21% of sales. The specialty product category including endodontics, orthodontics and implants had internal growth in the high single-digit for the year.

Gross margins for the fourth quarter were 58% of sales excluding precious metals, or an increase of 2.2 percentage points compared to the fourth quarter of 2007. The increase in gross margins is a result of favorable product mix arising from higher endodontics and implant growth in the period compared to base products.

Improving pricing and operating improvements offset somewhat by negative impacts from currency movements in various markets. Full year gross margins were 57.8% ex-precious metal, a 60 basis point improvement compared to last year and product mix, some favorable pricing and other operating improvements were the biggest contributors.

SG&A expenses were $173.6 million, or 37.2% of sales ex-precious metals in the fourth quarter of 2008, versus 35.5% in the fourth quarter of 2007. SG&A was down sequentially from the third quarter despite strengthening of our sales force in the period, as other cost containment initiatives were put in place to deal with market volatility.

Cost increased from recent acquisitions, but were offset by the strengthening of the dollar in the period. Total year SG&A was $739.2 million, or 37.1% of sales ex-precious metal in 2008 versus 37.1% in 2007.

Our sales growth for the year supported the key investments we made throughout the year. As Chris mentioned in his overview, we have taken a number of steps to both minimize some of the more discretionary cost items and our also taking additional steps in some locations to strengthen overall profitability while still investing in other areas to take advantage of a weaker competition during a softer economic cycle

While we incurred some restructuring charges in the fourth quarter, we do expect some additional restructuring cost this year as we finalize some cost improvement plans. However, we would expect the savings from our activities to have a rapid payback and we do not expect the charges to be very material.

In the fourth quarter, we did incur some restructuring in other cost. The primary charges coming from a write-down of a note due to changes in the market interest rates and products supply modifications, which occurred in the period. And in-process R&D charge from our recent acquisition and some charges associated with our cost reduction initiatives.

Operating margins were 16.8% including restructuring and other expenses in the fourth quarter of 2008. Operating margins were 18.3% on sales ex-precious metals in the fourth quarter of 2008 and 20% in the same period last year including restructuring and other charges.

Operating margin ex-precious metals on a non-GAAP basis, excluding restructuring and other charges in both periods were 20.9% for the fourth quarter of 2008 compare to 20.3% in the fourth quarter last year, a 60 basis point improvement. Full year operating margins were 19.1% on sales ex-precious metals in 2008 and 19.5% in 2007.

Operating margin on sales ex-precious metals on a non-GAAP basis, excluding restructuring and other charges were 20.7% in 2008 compared to 20.1% last year, again an increase of 60 basis in 2008.

Net interest and other expense in the fourth quarter was $9.9 million, or $9.5 million higher than last year's fourth quarter.

Interest expense was $3.9 million higher in the quarter while foreign exchange transaction losses and other expenses were $5.6 million higher in the quarter compared to the same period last year.

These transaction losses which primarily resulted from the settlement of the inter company transactions between our divisions were in addition to the negative $0.03 per share impact from foreign currency translation and purchase variances which were provided as an estimate in our third quarter earnings call.

Net interest and other expense for the full year was $24.9 million which was an expense increase of $28.1 million for the year.

Net interest expense was $15.4 million in 2008 compared to interest income of $2.6 million in 2007 or an increase of $18 million. The impact of foreign exchange transaction losses and other items in 2008 was an expense of $9.5 million in 2008 versus income of $0.6 million last year, or an expense increase of $10.1 million also primarily related to foreign exchange transaction losses.

The tax rate for the fourth quarter was 5.8% compared to 28% in the fourth quarter of 2007 however, the operational tax rates in these periods were 22% in the fourth quarter of 2008 and 30.7% in the fourth quarter of 2007.

The full year tax rate in 2008 was 20.1% compared to 27.5% in 2007. The 2008 tax rate of 20.1% included an operational rate of 25.9% compared to 30.4% in 2007. The company benefited from various tax adjustments of $17.1 million in 2008 compared to $9.9 million of favorable adjustments in 2007.

The favorable tax related adjustments in 2008 resulted primarily from a number of favorable tax audits and issue resolutions. The lower operational tax rate for the year is primarily as a result of the tax impact of a German tax rate change which became effective January 1, 2008.

This change reduced Germany's overall corporate tax rate to roughly 30% effective January 1 from approximately 39% in 2007 and prior. We are also benefiting from a global business initiative implemented in 2008 both of these items are expected to continue to favorably impact our operational rate.

The operational rate for 2009 is currently expected to be approximately in the same range as the operational rate in 2008. Although, may be impacted by mix and region tax rate changes.

To better understand and follow some of the following comments you can look at the tables included in our recent press release which provide a reconciliation from US generally accepted accounting principals or GAAP to an adjusted non-GAAP performance.

Net income for the fourth quarter of 2008 was $71 million or $0.47 per diluted share compared to $70 million or $0.45 per diluted share in the fourth quarter of 2007.

On an adjusted basis earnings excluding restructuring and other related tax adjustments in both period which constitute a non-GAAP measure were $67.8 million or $0.45 per diluted share.

In the fourth quarter of 2008 compared to $68.5 million or $0.44 per diluted share in the fourth quarter of 2007.

A 2.3% increase in diluted earnings per share, net income in 2008 for the full year was $283.9 million or $1.87 per diluted share. Net income for 2007 was $259.7 million or $1.68 per diluted share.

Net income for comparability analysis on a non-GAAP basis excluding the reconciling items in the press release for the years ending 2008 and 2007 were $285.5 million and $256.4 million respectively. This represents earnings of $1.88 per diluted share for 2008 compared to $1.66 in 2007, an increase of 13.3%.

Now let's look again it the cash flow and a few balance sheet items, operating cash flow was $99 million generated in the fourth quarter of 2008 and operating cash flows for the year were approximately $336 million compared to $388 million in 2007. 2007 however benefited from a tax net operating loss improving cash flow by $25 million in that year.

Capital expenditures were $76 million for year, yielding free cash flow which is operating cash flow less capital expenditures in dividends of about $233 million for the year.

Depreciation and amortization for the year was $57 million and inventory days ended the year at 100 days for 2008 year end versus 95 days last year.

Receivable days ended 2008 at 54 days compared to 59 days at the end of the third quarter of 2008 and 51 days at the end of last year. While we continue to closely monitor our accounts receivable exposure we are pleased with the tight control we have been able to maintain in this area.

The balance sheet remains very healthy at the end of 2008. The year ended with $204 million in cash and short-term investments with total debt of $449 million at the end of 2008.

That's why I repurchased 3 million shares or $113 million in 2008. Based on the company's authorization to manage up to 17 million shares of treasury stock we still have approximately 2.8 million shares available for repurchase.

We repurchased some shares in the fourth quarter and expect to continue to add some level of share repurchase in 2009. We continue to monitor market liquidity and our investment needs in making these decisions.

In looking at 2009, we expect completed acquisitions will add nearly 4% to 5% to the top line and are expected to be neutral to slightly dilutive to earnings per share in the first half of the year and neutral to slightly accretive in the back half.

Currency translation impacts are difficult to predict. However, at current foreign exchange rates, sales growth would negatively be impacted by approximately 6% to 7% in 2009 and will have a correspondingly negative impact on earnings.

Although global economic markets remain volatile. We do believe that even in a flat to slightly down global economy the dull consumable market should still show positive growth.

As Bret stated our guidance per earnings in 2009 is in the range of $1.85 to $1.95 per diluted share. This excludes restructuring and other cost, the reversal of the inventory step up from our recent acquisitions which will reverse in Q1 and Q2 and income tax related adjustments.

That concludes our prepared remarks and we would be glad to answer any of the questions that you may have at this time.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions). And we will take our first call from Derek Leckow with Barrington Research

Bret Wise

Good morning Derek. Are you there?

Derek Leckow – Barrington Research

Hi there.

Bret Wise

Hi Derek, how are you?

Derek Leckow – Barrington Research

Can you hear me now?

Bret Wise

Derek yes, very fine.

Derek Leckow – Barrington Research

Okay great thanks. So you had an unusual item in the fourth quarter was that anesthetic issue and I think you said it was resolved by the end of the quarter. But if you look at that negative 12.4%, what was the actual quantification of that impact on your sales?

Bret Wise

Well in total we work on it reviewing that as part of the inventory liquidation as well.

Derek Leckow – Barrington Research

Okay.

Bret Wise

And we said that would have been down mid single digits as in fact improves the anesthetic business is about a third of that impact.

Derek Leckow – Barrington Research

It’s a pretty bit impact, so would your internal growth rate have been slightly positive without that?

Bret Wise

The internal growth rate for the full role would have been kind of flattish without that.

Derek Leckow – Barrington Research

Flattish, okay. And you said that it was still lingering, what was the issue there, wouldn’t that be reasonable to assume that we see orders kind of making up for that gap in the early part of the year?

Bret Wise

Yes, if production goes smoothly at the outsourcer and they can keep up with the demand that would be the case.

Derek Leckow – Barrington Research

Okay. And was there a corresponding bottom line impact from that also?

Bret Wise

Of course, we lost a margin on those sales during the quarter.

Derek Leckow – Barrington Research

Was it about a penny or how much would you say that was?

Bret Wise

I would say probably between half a penny and penny something of that sort.

Derek Leckow – Barrington Research

All right. And then you had really excellent performance on margins and I guess your, I think from Bill's remarks it sounds like those margin improvements are expected to be sustainable even with the lower sales volume, is that right?

Bret Wise

I think that's right. We target 20 to 50 basis points a year in margin improvement. In the current year we got 60 basis points, so we are little bit above that may be contingency plans that Chris, went through are ways that we would try to preserve profitability and margins even in a slower growth environment. So, we continue to target that 20 to 50 basis points per year, although, one year it's over the longer term, so some years will be above that range some years will be below that range.

Derek Leckow – Barrington Research

Okay, so this year probably less than probably more like 20 this year, right?

Bret Wise

Well, it just difficult to predict because we do not know what's going to happen this year.

Derek Leckow – Barrington Research

Okay.

Bret Wise

But I guess my message would be that we still have programs in place to generate margin improvement, we are going to try to do that irrespective with the environment.

Derek Leckow – Barrington Research

All right. If we try and analyze the bottom line for next year in your guidance in terms of what you said regarding currency you said about $0.03 top line hit as well as $0.03 transactional impact, is that still the same impact you are expecting for '09?

Bret Wise

Yeah, Derek that was for the fourth quarter of 2008 that you are talking about and if you look at kind of the impacts that we have got within that category, I think the volatility of the movements and some of the exchange rates that have moved in different directions, may continue to have if rates stay the same as much as $0.03 to $0.04 per share drag on this.

But the transaction side that was stated that $6 million that was in the fourth Q that's really because of a settlement of inter-company transaction. So it was because of the volatile movement if rates remain relatively the same in this period that line should literally kind of go back to zero. And I think from a projection perspective and for our internal estimates and planning. We always assume that zero because its really dependant upon were interest rates go within the quarter up or down, and you just don't know what those are specifically going to be.

So we would expect that piece of the impact to in essence be flat.

Derek Leckow – Barrington Research

That becomes a very easy comparison as you move through the year, right?

Bret Wise

Well, for the fourth quarter that should be an easy comparison and once again you have got high level of exchange volatility in that period.

Derek Leckow – Barrington Research

Let me stop there, thanks a lot guys. Appreciate it.

Bret Wise

All right, Derek thanks.

Operator

And we will now take our next question from Jon Wood with Banc of America Securities.

Jon Wood – Banc of America Securities

Hi, good morning.

Bret Wise

Good morning, Jon.

Chris Clark

Jon, how are you?

Jon Wood – Banc of America Securities

Good, Bret, you do have the end user data now in the US, I am assuming, can you just give us some level of color in to how long you think the destocking, trend continues into the next year? And if you got any perspective on the international market, so that will be great as well?

Bret Wise

Well, I think the destocking that happen in the fourth quarter, was pretty dramatic actually. Its hard for us to tell, whether there is more to go yet or not because we don't get dealer inventory levels and we certainly don't get dentist inventory levels. And so it's possible that it could continue for a while but it was pretty severe in the fourth quarter and so we would hope that we have seen most of it at this point.

With respect to, and you brought we had end user data and we also get other measures of dealer sell out of our products. And that's why we have reasonable confidence that this has happened.

Looking at international markets I think it happens some of international markets but not nearly to the extent it happened in the US and I have no reason to believe that it's going to continue or get worse in international markets as we move forward.

Jon Wood – Banc of America Securities

So, there is just from a devaluation of some of the currencies internationally in Eastern Europe and Asia that is not having an impact that you can see?

Bret Wise

Well with respect to devaluation of the currencies in those developing countries and I am glad you raised it, it's an important factor. I mean it is making products produced in Europe or the US much more expensive in those countries or depressing margins in those countries. So that could have an effect and I think we began to see a little bit of that impact now whereas there is some pricing pressure in those markets.

Jon Wood – Banc of America Securities

Okay. And then so just so to understand on the FX situation, so you said negative five to seven on the top line and a similar on the bottom-line. So that implies about $0.09 to $0.13 of EPS headwind, am I doing that right?

Bret Wise

Yes, I think as we stated if exchange rates kind of stay where they are at right now we would expect that drag is probably in that $0.03 to $0.04 range. Obviously as you move through into the per quarter. And as you move into fourth quarter of next year which is where the rate obviously changed quite dramatically that quarter should probably not impacted as much or nearly as much as the first few quarters.

Jon Wood – Banc of America Securities

Okay and than just quickly, Bill I am sorry if you give this. Did you give us operating cash flow and CapEx guidance for 09?

Bill Jellison

I did not give guidance associated with that from a CapEx perspective I think that you can probably use some thing in the range of, probably in the $70 million to $80 million should be a reasonable for this year as well. And on the cash flow side of the equation, I would expect that, just running your model through from that perspective would expect some slight improvements on the inventory day side of the equation for sure and hopefully our expectation is that we are not going to give that up in the days.

Jon Wood – Banc of America Securities

Yep.

Bill Jellison

Thanks Jon.

Operator

And we will take our next call from Jeff Johnson with Robert Baird.

Jeff Johnson – Robert W. Baird

Thanks, good morning guys.

Bret Wise

Good morning Jeff.

Jeff Johnson – Robert W. Baird

What's the, let me just start Bret, with a couple of things, I guess one touching on guidance for '09, typically over the last few years we thought of your guidance as being conservative and you guys give yourself a bit of a cushion. This year it obviously doesn’t feel like the year and necessarily be thinking that way especially I know you are not giving growth guidance or organic growth guidance. But it sounds to me you are thinking that dental consumable market, 80% of it flat slightly up 20% of it up mid single digits.

Is that the kind of organic growth again trying to stay away from your specific guidance? But is that kind of how you guys are baking in to get your buck 85 to buck 95 that we do get some organic growth for the year out of you guys?

Bret Wise

Well I think its fair to say, two things I would say. First of all I would warn that we really haven't seen an environment like this for a long time, at least not in our institutional memory here and thus these, the guidance is, I would characterize it as less certain than it has been in the past. So that gets back to your earliest comment there about I wouldn’t characterize our guidance as conservative or aggressive either one. But I would characterize it as having many more variables than we are used to happening to deal with.

With respect to growth if we look back overtime we can see the general market has traditionally held up better than the overall economy. And thus if we see a slight contraction in the economy the overall GDP economy in the developed world we think that dentistry could continue to grow, although, modestly and we would think we get our share or that perhaps we get more than our share that hopefully.

And thus that kind of the basis that we are looking at our earnings guidance for next year.

Jeff Johnson – Robert W. Baird

Okay. Fair enough. So, we go a quarter or two into this the economy isn't getting better organic growth is staying down. There is risk to the downside to that guidance but at the same time I guess the message is if we get a couple of quarter in and we start to see a little economic recovery then you are feeling pretty comfortable at make a couple of points of organic growth?

Bret Wise

Yes, I think that there is probably equal downside risk and upside opportunity in our guidance.

Jeff Johnson – Robert W. Baird

Yes, and how it feels in my model I don’t disagree with that. Next question I guess Bret also kind of just bigger picture, you guys have been investing in headcount even in Q4 at least our understanding on the endo and implant side maybe elsewhere. Most of your competitors are just others throughout the world cutting headcount here or the very least more aggressively managing the expense side. I guess kudos but not doing that I gives you, it's insight in your conviction and your ability to grow here at least whether the storm, but at the same time is there a reason you are not getting more aggressive may be on the expense side as market flow so significantly here?

Bret Wise

Well, I am going to let Chris to address that, because we have done a lot of work in that area and he kind of started to address this prepared remarks, so Chris, can you elaborate on that.

Chris Clark

Thanks Bret, yeah, Jeff, I think the way it goes, I think is reasonable I expected most companies in environment or obviously looking at fixed cost and we are certainly there as well. Many companies and we are going down the similar approach of kind of establishing of Phase I even phase II contingency plans if you will and we are taking really cascading approach to it.

We are starting obviously with discretionary items including Phase III consolidated individuals as I mentioned, some overhead reductions and some localized restructuring plans and obviously if the situation warrants and the recovery isn't strong or even goes the other way we are prepared to go, you have to go further, we need to.

Yeah, at this point, I mean, we fundamentally think from the strategies we’ve had particularly in the expanding our sales representation certainly have been very helpful for us, in terms of benefiting the business and certainly can continue to benefit the business downstream as the market recovers.

So we have invested in sales representation even over the last six months, both in developing and developing regions. Hopefully we can use the strength that we got as a company to take some share from some of the weaker players in this economy. And position to come back on the backend of the recession have been stronger. But obviously it is a series of weird contingency plans and I would say that we are taking a pretty serious look at cost, but obviously we are trying to balance that with upside opportunities.

Jeff Johnson – Robert W. Baird

All right, Fair enough, and I guess just a follow up there taking your comments Chris and Bill your comments are meaningful restructuring costs at least a dump in to our mile for '09 at this point there is nothing on the books officially as far as restructuring or any kind of salary payouts that would have to go out or anything like that with anything that's like I said at least officially on the books?

Chris Clark

I would say Jeff that what we are looking at consistent with what we typically looked at in the past, I mean, if we have opportunities to restructure and improve the business we will certainly do that and if the situation wants that we need to go be more aggressive in that area, we will. So, I would characterize it more in keeping with probably past practices.

Jeff Johnson – Robert W. Baird

Sure. Alright, last two questions, you come up against some tougher international comps especially in Europe over the next couple of quarters sounds to me you feel like that's hanging in fairly well at this point. Even against those more challenging comps spread are you confident we get positive growth there to offset the continued pressure is here in the US or just how should we think about the difference there in the region?

And then Bill last question for you, if I take that transactional loss from the quarter on inter company loans out. We have also seen now a narrowing of Euro interest rates which should benefit you. I believe going forward narrowing versus US LIBOR anyway, is it fair to think of your net other line below $15 million all in next year or how do we model that?

Bret Wise

Okay, Jeff. Let me, this is Bret, I will take the first question and then Bill, can take the second question. With respect to Europe as you can imagine there is many different countries there and the growth dynamics differ pretty widely by country but generally speaking I would characterize that things are little better in Europe than it has in the US Although this quarter you saw a growth rate cut in half and what it been earlier in the year.

So, although it's hard to generalize, if I had to make a statement now I would expect that our growth has a better opportunity to be stronger in Europe than in the US at least at this juncture. Bill, can you address this second question?

Bill Jellison

Sure. Jeff as far as the information is in the interest and other line category I think the assumption that you are making and the FX transaction related loss side of the equation could absolutely be neutralized. I think on the narrowing of the interest rates and the equation that absolutely we do expect to see an improvement in the interest rate, differential our investment, hedges that we have go out there. Keep in mind though that on the cash balances that we have we will be earning much less income on those cash balances in '09 than we did in '08 but yes, I think you can assume that, that line category should be improved in the neighborhood of kind of the items that you identified.

Jeff Johnson – Robert W. Baird

Alright, great, thanks guys.

Bret Wise

Thanks Jeff.

Operator

(Operator Instructions). And our next question is from Mr. Bentic M with Aerovena (ph).

[Bentic M – Aerovena]

Hi, good morning.

Bret Wise

Good morning.

[Bentic M – Aerovena]

I am less worried if you give this number earlier. Can you give the organic sales growth of the dental implant business in the U.S. and outside U.S.?

Bret Wise

No, we did not give those numbers and typically we do not give precise numbers by business or I will tell you that our global implant business grew in the low to mid single digits organically in the fourth quarter actually closer to the mid single digit and low and it was negative in the US.

[Bentic M – Aerovena]

Negative in the U.S.

Bret Wise

Yes.

[Bentic M – Aerovena]

Also if you could provide some color on how the dental implant business would grow in 2009, probably about the growth rates and et cetera?

Bret Wise

Well, we don give specific guidance by category. What we have said really throughout this year is that we knew the dental implant category and the orthodontics category is been kind of the most discretionary product areas we have and thus probably most vulnerable to economic downturns and that's played out about as we predicted actually.

So I am going decline to give a projection of implant growth for the market next year, although, I think in the weaker economy it will be under pressure because it's usually not reimbursed and it's expensive.

Bill Jellison

Bret, may I add as well, I mean it is clear based on the announcements from our public competitors that we do believe even with the numbers that Bret, mentioned we are growing on a high end what the market growth is. And actually capturing share in the implant segment globally despite obviously the tough economic conditions and discretionary nature of purchase as Bret mentioned.

[Bentic M – Aerovena]

All right. That's helpful. Thank you.

Bret Wise

Thank you.

Operator

And our next question is from Chrisman Bogan (ph) with MTB Investments.

[Chrisman Bogan] – MTB Investment

Thanks. Good morning. Can you just talk a little bit and may be give us some color on the impact that you are saying private label is making in your business and how that might look going forward in terms of private label market share pick up?

Chris Clark

Yes, sure. There are always going to be dentists that make purchase decisions based on cost and we do believe that some of the fringes in this environment might be looking to take cost out via product selection, but I guess I would say that in general and we believe even in a tough economy. The fact is the primary thing dentists want are really good long term clinical results and products that really improve the efficiency and effectiveness of the procedure. And I think there might be a little bit of pressure on the fringes, but I do not think there is going to be wholesale change if you will in the context of the market dynamic.

One other thing to keep in perspective is that in the cost of supplies is really only 6% to 7% of the typical dentist cost structure in terms of the dental laboratory. So, it's really not that significant and you obviously with most of products being consumable obviously the cost of any individual product is quite small. So, on a relative basis. I think basically ask you to keep that in mind as well.

[Chrisman Bogan] – MTB Investment

Do you have any specific numbers that you track in terms of private label share?

Chris Clark

We certainly, we track private label and obviously track different segments of the market including the value branded opportunities and products and I think I mentioned some opportunities we have made segment relative to both assortment ZHERMACK portfolios in my prepared comments. So, yeah, I mean that’s something we certainly keep an eye on.

Bret Wise

And over the long term we have not seen that very much, private label has had small portion of the market for sometime and it does not move much from the market share that from period-to-period.

[Chrisman Bogan] – MTB Investment

Okay, so I mean, it would be fair to say then that, I mean even in this type of economic environment, you have not really seen a significant pick up in private label.

Bret Wise

I think that’s, fair assessment.

[Chrisman Bogan] – MTB Investment

Okay. Thanks.

Bret Wise

No problem.

Operator

And we will take our next question from Adam Pusard (ph) with Barclays.

[Adam Pusard] – Barclays Capital

Hi good morning guys, just a quick clarification for Bill, Bill increase in the minority interest and consolidated subsidiaries, is that due to ZHERMACK or anything else, its little color there that will be helpful.

Bill Jellison

Yeah, its due to from an income statement perspective, its not due to ZHERMACK because we did not have any charges there accept on the expense side on the equation but we did start consolidating materialized dental in the period as well as to so both of those two would have impacts and minority interest moving forward.

[Adam Pusard] – Barclays Capital

Okay, great, thanks a lot guys.

Bill Jellison

You bet. Just for clarity on that last question, we acquire ZHERMACK on the last day of the year and thus our income statement does not have any sales or expenses other than the in-process R&D write-off ZHERMACK.

Operator

It appears that there are no further questions at this time Mr. Wise, I would like to turn the conference back over to you for any additional or closing remarks.

Bret Wise

Okay. Well, thank you again for joining us this morning and your continued interest in DENTSPLY. I think despite the pretty difficult economic environment here in the fourth quarter we had a very good 2008. We also believe the missions and strategies we have remain strong and will allow us to grow faster than the underlying global dental market.

We have very strong balance sheet and cash flow model. We feel very confident about our position and believe that we can weather well whatever economic storm confronts us here in 2009 and prosper going forward. And of course we look forward to updating you on our progress as we move through 2009. Thank you.

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