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Executives

Bret Wise - President, Chairman, and CEO

Chris Clark - EVP and COO

Bill Jellison - SVP and CFO

Analysts

Jon Wood - Banc of America

Derek Leckow - Barrington Research

Jeff Johnson - Robert W. Baird

Yi-Dan Wang - Deutsche Bank

Greg Halter - Great Lakes Review

Heidi Laurents - George Weiss

Adam Prusard - Barclays Capital

Elan Chaitovitch - Redburn Partners

Gary Hatton - Granahan Investments

John Venusti - Kynikos

DENTSPLY International (XRAY) Q1 2009 Earnings Call May 1, 2009 8:30 AM ET

Operator

Welcome to the DENTSPLY International First Quarter Year 2009 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Bret Wise, the Chairman, and Chief Executive Officer. Please go ahead sir.

Bret Wise

Welcome everyone. Thanks for joining us on our first quarter 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 Jellison, our Senior Vice President and Chief Financial Officer.

I would like to begin today's call with some overview comments regarding our results for the fourth quarter and some insights into where we see the state of global dental market.

Chris is then going to provide some insights into our cost containment efforts and how we are balancing that with growth initiatives as well as new product launches. And Bill Jellison will then provide some detailed insights on the financial results. And following our comments of course, we will be glad to take any questions that you have.

Before we get started, it's important to note that this 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 our most recent annual report, on Form 10-K, and also the periodic reports we have in Form 10-Qs, press releases etcetera SEC. And recording of this conference call in its entirety will be available on our website.

Last night, we announced our results for the first quarter 2009. As noted in the release, first quarter sales decline 9.6% on a GAAP reporting basis, and declined 6.2% excluding precious metals.

This decline of 6.2% in sales in the quarter was greatly influenced by the strength of the dollar, as you know which resulted in a negative impact from currency translation of 6.9%.

Accordingly, absent the adverse impact of currency translation, we reported sales growth of 0.7% in local currencies. This constant currency growth reflects internal growth, which was negative 3.7% and acquisition growth that offset that which was positive 4.4%.

The global dental market appears to be contracting slightly in the first quarter. I would say probably in the 2% to 4% range. The slowing is most notable in the equipment side of the business including small equipment, which appears to be impacted more in this slowdown than past economic downturns. This is pertinent to us as, while we are predominantly a consumable company, we do sell small equipment that goes along with those consumables and that represents just over 10% of our mix.

Anecdotal evidence from the market includes a notable lower attendance at recent US dental shows, certainly probably some slowing office visits and in some cases downgrading of procedures.

In Europe, I would say the signals are more mixed. The international dental show or IDS, which is held every two years in Cologne, Germany took place in March. It had record attendance, which was up double-digits from the last show held in 2007. And, to us that indicates a high level of continuing interest in new dental technologies in that market. However, dental product sales in Europe are now certainly contracting versus 2008, in many ways comparable to what we see in the US market.

Our own internal growth performance in the quarter was influenced by a couple of things, first the performance of our non-dental business, but also the performance of small dental equipment and to some degree dental inventory reductions. You will recall that approximately 3% of our mix is non-dental.

Those product categories had a negative impact of almost a full percentage point on our internal growth in the quarter. Accordingly our dental business contracted just under 3% in the quarter on an internal growth basis and with acquisitions our dental business grew between 1% to 2% constant currency.

In addition, if we look at the small dental equipment categories across all of our product groups, those products contracted double-digits in the quarter and contributed to almost another full percentage point of negative growth during the period.

We normally don't break our sales down in this fashion but in this period of rapid changes in the economy and the substantial swings we have seen in currency, I think it's important to understand that the underlying dental consumables in our mix were essentially down only slightly in the quarter on an internal growth basis, and grew low single digits constant currency. This despite some continued inventory reductions by our dealers and end users in many geographies.

Our geographic internal growth was balanced this quarter with the US contracting 3.9%, ex-precious metals, again this is on internal growth basis. Europe was down 3.3% and rest of the world was down 4.2%. The rest of world category was greatly influenced by developing countries, where currencies have devalued rapidly against both the dollar and Euro.

Interestingly our specialty businesses as a group continued to grow in the quarter with ortho and endo generating low to mid-single-digit internal growth and the implant category down just slightly on an internal growth basis, but that was due entirely to demand declining and inventory reductions in the developing countries. Absent those markets, our implant business continued to grow in the developed world.

Our chairside consumable products and our laboratory product categories both contracted in the quarter, influenced by the slow economy, but also these are the categories most impacted by inventory reductions at dealers, and to a lesser degree in used locations and also these categories are most affected by those small equipment categories.

Moving to earnings, we encountered significant headwinds from currency in the first quarter with the dollar strengthening 13% against the euro, 6.5% against the swiss franc and 20 to 30% against the basket of developing country currencies compared to the end of last year. This reduces our earnings from translation of profits generated in those countries, which usually is offset to some degree by our hedging activities.

Despite this headwind, we did report $0.43 per diluted share on a non-GAAP basis in the quarter, down about 4% from the prior year quarter and Bill will cover our earnings in more detail, but overall we view this as a reasonably good performance, given the state of the global economy and the dramatic strengthening of the dollar that we have seen.

Looking forward, the economic outlook certainly remains uncertain. As noted previously, we believe dental consumables have, and will continue to hold up better than the overall economy in good times and in bad, and we have no reason to believe otherwise at this point.

As we look to the rest of the year, we are not expecting a dramatic improvement in the market in Q2, but we do believe that conditions could improve somewhat in the back half of this year. So based on our Q1 performance and expectations for a continued slow market in Q2, our current estimate is for full-year diluted earnings per share to be in the $1.80 to $1.90 range, which is slightly lower than the original guidance we gave you at the end of January.

This of course is on a non-GAAP basis and excludes restructurings and other cost, the acquisition related costs recognized here in Q1, which Bill will elaborate on more and any tax adjustments.

In these market circumstances, we have been working very hard to balance our cost management initiatives with our continued investments for growth, including new products and Chris Clark, our President and COO is going to elaborate on that for you further now. Chris?

Chris Clark

Thank you, Bret and good morning, everyone. I would like to take a few moments and give you insights into two areas. First an update to the approach we are taking from a cost containment standpoint and then key initiatives and new product launches that should provide us a solid growth platform, even in the currently challenged economic environment.

The key contributor to our first quarter results was a strong organizational focus on cost containment, because our businesses proactively took actions to create and maintain both operating and financial flexibility, as a result of the uncertain underlying economic conditions.

While our first quarter expenses reflect the impact of our recent acquisitions as well as the cost of the biannual IDS show, we were very pleased with the spending approach of our businesses.

Our business leaders continued to closely monitor discretionary spending, delaying and eliminating nonessential or lower priority programs. For example, our travel within and from the US is down by more than a third so far this year, as our managers utilize video conferencing and other more cost-effective communication approaches where possible.

On the fixed cost side, we are continuing our pragmatic approach of identifying cascading contingency plans that can be implemented on a business specific basis should the situation warrant. Many of our businesses, primarily those that are more heavily impacted by the current economic climate have already taken steps to reduce their fixed costs.

You might remember that in our fourth quarter call we mentioned that we anticipate modest restructuring charges as we move through 2009 as our businesses address fixed cost. In Q1 we took approximately $1.6 million in restructuring and other charges, most of which were related to these actions and we anticipate a generally similar approach as we move through the remainder of the year.

I would like to reiterate that any actions taken will likely be very minimal in the areas of sales representation, and research and development. This approach allows us to address the need for flexibility during the period, while also insuring that we maintain focus and support towards strategic growth areas and initiatives, both now and in the future. To that end, we continue to make targeted investments in key growth areas and initiatives, despite the current negative economic conditions.

We are continuing to invest in sales representation on some key businesses, as we believe that additional customer reach and call frequency will providing meaningful growth over the next few years. We are also spending to leverage opportunities created from our recent acquisitions. We continue to focus on value oriented product opportunities through the Fulton and Zhermack platforms. These brands often address the more price sensitive customer segments, compared to users of our premium restorative brands.

In addition, we are continuing to expand the geographic reach of our customized precision implant bars and bridges that are manufactured by E.S. Healthcare and now we are leveraging that through the established DENTSPLY infrastructure. We continue to be very pleased with the customer acceptance of the E.S. products and again we are particularly pleased in the current economic environment.

We also continue to focus spending on innovation efforts and leveraging new product introductions, as customer adoption in the new technologies continues to be a key driver of market share. We were very active in this front and we introduced about 15 new products in the quarter, most of which were introduced at either the IDS show or at the Chicago mid winter show in February.

In the specialty areas we have recently introduced our Orthoplex 3D orthodontic modeling solution from GAC. This system assists clinicians in case analysis and planning. It accelerates the production of customized orthodontic appliances and eliminates the need for the orthodontist to keep historical patient models, thereby reducing both cost and inconvenience for the customer.

This system continues to expand our presence in the developing digital orthodontic market. In the endodontics, we introduced eight new products in this segment alone in the first quarter of 2009 including the X-mark easy cordless endodontic motor. This system delivers the benefits of stronger performance and it improved the ease of use for the dentist.

Finally at the IDS, we introduced the next general race Cercon milling machine. The Cercon Brain 2, as well as the next generation of Cercon art software. These launches allow for the milling of larger or Zirconia blanks as well as for the use of expanded materials and applications. It provides cost efficiencies and more business opportunities to our laboratory customers.

We were very pleased with the reaction by laboratory customers in Europe to the next generation of the Cercon system at the IDS and we anticipate initial shipments in Europe later this quarter.

I would now like to call over to Bill Jellison, our Chief Financial Officer to discuss the first quarter financial results in greater detail. Bill?

Bill Jellison

Good morning, everyone. As Bret, mentioned, net sales for the first quarter of 2009 decreased by 9.6% in total and decreased by 6.2% excluding precious metals. The sales decrease ex-precious metals for the quarter included a constant currency increase of 0.7%, which includes a 3.7% decrease from internal growth and a 4.4% increase from acquisitions. The quarter also was negatively impacted 6.9% from foreign currency translation as the dollar strengthened against most currencies from last year's first quarter.

The geographic mix of sales ex-precious metals in the first quarter of 2009 included the US at 39.6%, Europe represented 42.1% and the rest of the world was 18.3% of sales.

Our non-dental business had a negative impact on our total internal growth rate of nearly a full percentage point in the period. The strong dollar in the first quarter compared to most currencies in the same period last year not only negatively impacted our sales growth, but also had a negative impact on earnings per share in the period of approximately $0.03 cents.

Gross profit margins as a percentage of sales ex-precious metal content in the first quarter of 2009 were 57.3% compared to 57.5% for the first quarter of 2008. The rate was negatively impacted in the quarter compared to the same period last year due to the impact of recent acquisitions, including over a half a percentage point for recent acquisitions-related activities, which was the roll-off of the inventory step up.

Operating improvements and product mix within the product lines helped to offset most of the rate impact from the acquisitions. We do expect the recent acquisitions to continue to have a modest negative impact on margin rates for the rest of this year.

SG&A expenses were $179.2 million or 38.5% of sales ex-precious metals in the first quarter of 2009 versus 37.1% in the prior year's first quarter. These expenses were lower than those in last year's first quarter. However, they were negatively impacted when measured as a percent of sales primarily due to higher expense levels in our acquisitions and costs associated with the biannual international dental show or IDS.

The recent acquisitions which have a higher expense to sales run rate than our base business also had a negative impact on our SG&A expense levels. These acquisitions are expected to run at a higher percent level through the remainder of the year as these businesses are fully integrated into the company.

Operational margins for the quarter were 17% compared to 18% in the first quarter of last year. Operating margins based on sales excluding precious metals were 18.5% compared to 20.4% in the same period last year. Operating margins based on sales excluding precious metals, for comparative purposes, excluding recent acquisitions, acquisition-related activities and restructuring and other costs in both periods would have been 19.4% in the first quarter of 2009 and 20.4% in 2008.

Most of the change in operating margin rates is due to the fact that we are in the early stages of integrating and investing in the recent acquisitions, as I mentioned earlier. So our base businesses continue to have very solid drop-through in the quarter despite the negative sales pressure in the period.

Net interest and other expense in the first quarter was $5.1 million compared to interest expense of $6.2 million last year in the first quarter. The reduction in expense in this area resulted from lower foreign exchange transaction losses in the period offset somewhat by slightly higher net interest expense as interest income rates have dropped significantly and also from the strengthening dollar as our cash investments are held in Europe.

The current tax rate in the quarter decreased to approximately 26% from approximately 28% in the first quarter of 2008. This rate reduction primarily relates to the benefit of the global business and tax free organization which was recently completed. We expect this to be a reasonable assumption for an operational tax rate for 2009 and is consistent with 2008 full year operational tax rate.

DENTSPLY’s net income the first quarter of 2009 was $61.7 million or $0.41 per diluted share compared to $68.2 million or $0.45 per diluted share in the first quarter of 2008. DENTSPLY’s net income on an adjusted non-GAAP basis, excluding the role off of the inventory step-up, restructuring and other costs, and income tax related adjustments was $64.1 million or $0.43 diluted share in 2009, compared to $68.9 million or $0.45 per diluted share in the first quarter of 2008.

Cash flow from operating activities in the first quarter of 2009 was approximately $11 million compared to $30 million in the same period last year. The cash flow in the first quarter of 2009 was lower than last year really due to both a lower net income in the first quarter last -- and compared to last year and also an increase in inventory levels in the first quarter of this year. The capital expenditures were $14.2 million in the first quarter with depreciation and amortization of $16.4 million in the period.

Inventory days were 110 at the end of the first quarter of 2009, compared to 100 at the end of the first quarter last year and also at the end of 2008. Inventory increased primarily due to increases in purchased products and due to the softer sales in the period without the corresponding reduction in our production.

Receivable days were 58 days at the end of the first quarter of 2009, compared to 57 days at the end of the first quarter of 2008 and 54 days at the end of 2008. We believe our accounts receivable are actually in good shape considering the worldwide softening of the global economy and continue to be focused on that activity within our entire team.

At the end of the first quarter of 2009, we had $226 million in cash and short-term investments, total debt was $486 million at the end of the first quarter and we had availability between both our cash and our available debt under a revolving credit agreement of between $500 million and $600 million.

During the first quarter we have repurchased approximately $5 million of our stock or approximately 200,000 shares at an average price of roughly $23. Based on the company's authorization to maintain up to 17 million shares of treasury stock, we still have approximately 3 million shares available for repurchase.

Finally, as Bret noted, based on an updated assessment of the global economy and the dental markets around the world, we are revising our full-year guidance for diluted EPS to a range of $1.80 to $1.90 per share, excluding the impact of restructuring and other costs, acquisition related activities and one-time tax adjustments.

That concludes our prepared remarks. Thanks for your support and we would be glad to answer any questions that you may have at this time.

Question-and-Answer Session

Operator

Thank you, Mr. Jellison. (Operator Instructions). Our first question is from Jon Wood with Banc of America.

Jon Wood - Banc of America

Hey, good morning.

Bret Wise

Good morning.

Bill Jellison

Good morning, Jon.

Jon Wood - Banc of America

So, Bret, first on the small equipment situation, I know it's difficult to probably estimate this but the IDS show, I mean did that have any impact in pushing some of that into the June quarter? I guess another way to say it is, is the order book for the small equipment better in April?

Bret Wise

Good morning, Jon. I wouldn't characterize it that way. The way we are interpreting what we see in small equipment is that in many ways small equipment is a deferrable purchase. You can continue to limp along with your existing equipment or not upgrade your existing equipment and thus it's more deferrable than a consumable that you've got to use on the patient or in the patient that day in your practice and thus our interpretation, and that's all it is,

The dentists are just getting a little bit more conservative and deferring to the extent they can those purchases, which are not huge purchases. They are usually items in the $3000 to $5000 range but in this economic environment they are choosing to be a little bit more conservative with their cash. That's the way we are interpreting it.

Jon Wood - Banc of America

Understood, okay. And so, Bill, did Zhermack lose money in the quarter or is that materialized? I'm just surprised to see the minority line swing negative?

Bill Jellison

Yeah. Keep in mind that the minority interest line there reflects about three different acquisitions that have actually there's minority interest in those acquisitions and a couple of the acquisitions both Zhermack can materialize -- are both new acquisitions that actually we have acquired because we think that they have got some good technology, we are investing in that technology within the period and also keep in mind that their margin rates for both of those businesses are lower than our overall company average. So it's both a combination of working on the first quarter of the integration as well as the heavier investment level in those divisions.

Bret Wise

And Jon, I would add to that that remember Zhermack was bought on the last day of last year and the way we do purchase accounting is we have to value their inventory they owned them on that date, at its sales value. So the first turn to inventory, there's no gross margin on it and thus you have got to cover all your fixed costs with no gross margin, which is not an easy trick to do.

So that number in the first quarter is much bigger than it would have been had we not had that inventory -- that acquisition-related cost that Bill had mentioned earlier.

Bill Jellison

Yes. That 1.8 million that you see there, if you exclude the step-up of the roll-off of the step-up of the inventory, it would have probably been about $1 million.

Jon Wood - Banc of America

A $1 million loss?

Bill Jellison

A $1 million loss, that's correct.

Jon Wood - Banc of America

So, Bill, on the balance sheet, is there -- can you talk about just give us some parameters around cash flow this year? I mean, should we expect a flattish type experience for the year on cash flow?

Bill Jellison

Yes, I mean, based on kind of the guidance that we are giving on the earnings per share side of the equation, Jon, I think that, the guidance that we have got out there is for our earnings to be at or slightly below where we ended last year at. So with that, yes, we would expect our cash flow to be slightly under where we were last year. I think some of the impact in the first quarter is because of the inventory-related activities, which we have got a lot of focus on, as well as in the AR area, although AR, I think the accounts receivable area was in pretty good shape considering the broader based economy.

And do we think that it's maybe a day or two different, over the course of the year than last year? Yeah, I think that's reasonable on the AR side and I would hope that our inventory levels that, we would continue to work on bringing those back in line.

Jon Wood - Banc of America

Okay, understood. Last quick one, should we assume -- stock buyback continues at a more tempered pace here, given the visibility or do you have appetite to step that up in the near term?

Bret Wise

Well, John, we usually don't comment on our intentions about stock buybacks but we do have the 3 million shares authorized. You saw us buy a little bit of stock back this period and as we have said in the past, we would probably be active in buying back our stock kind of on a consistent basis. So that's the guidance we give you at this point.

Jon Wood - Banc of America

Understood. Thank you.

Operator

Our next question comes from Derek Leckow with Barrington Research.

Derek Leckow - Barrington Research

Thank you. Good morning.

Bret Wise

Good morning.

Derek Leckow - Barrington Research

North American consumables, you are one of the few manufacturers that has pretty high quality end user data and I just wondered if you could compare for us the sales to your dealers versus sales to end users, and what that tells you about the progression of sales growth for the year?

Bret Wise

I'll give you a shot at that. What we saw in the consumable category, this excludes the small equipment segment that we kind of outlined for you today, was that retail sales of our products were more like flat, whereas on a wholesale basis they contracted. So we saw a pretty meaningful inventory reduction in the dealer channel. The United States is the only place we get the end user data, keep in mind.

So in other areas of the world it's a little more difficult to figure it out although we do have some indications what's going on in those parts of the world as well, especially the developing countries where we think there's been a pretty big inventory reduction. But at this point, I would say wholesale is trailing retail by a couple of percentage points.

Derek Leckow - Barrington Research

And despite that, you said you grew low single-digit in consumables?

Bret Wise

No, no. Our consumables and our lab consumables contracted this quarter.

Derek Leckow - Barrington Research

What were North American dental consumables?

Bret Wise

Well. We don't break it down to that level of granularity. But we gave you what that non-dental piece was on the results, we gave you the equipment effect on the results and the specialties, where there are no dealers between us and the end user group.

So by inference, you can see that wholesale, our dental and lab consumables were down low to mid single-digits

Derek Leckow - Barrington Research

Oh, I see. Okay. Do you feel that the inventory levels that dealers are such that there might be customer service issues at this point or have we not gotten to that level yet?

Bret Wise

I'll let Chris answer that. I'm not aware of any.

Chris Clark

It's hard to tell, Derek. To be honest to you, we have not had significant reports of significant customer service issues because of lower dealer inventories. What I would say, though is that, my sense is that dealer inventories could continue to contract a bit moving forward.

I think the phenomenon that we have seen certainly worldwide over the last couple of quarters, there's no reason to believe that it would necessarily stop here. So, from that angle, I think that it is something that, we look at and we want to continue to monitor in terms of customer service levels, but at this point in time we haven't seen any huge outages.

Derek Leckow - Barrington Research

Okay. And then, just a second question to follow-up on the European situation, at the IDF show, if my memory serves right, that didn't, in fact in the past lead to some deferral purchasing activity, as doctors wait to attend the show, see the new equipment and then make a decision and did I hear you correctly to say that, you don't feel that's the case this year? This is a little bit unusual, I think.

Bret Wise

I think it's too early to tell to be honest. There is a lot of interest in new technologies at the show and as I mentioned, the attendance was up double-digits at the show. So it was a robust environment for reviewing technologies and so forth and so on. What usually happens then is that our reps get follow-up leads, they go out in the field in a couple of months following the show. And that's if they are going to make a sale, that's where they make it on the equipment side.

So I'm not being negative about that, I'm just saying it's probably too early to really tell whether, what impact that had on small equipment in the first quarter, and whether that will cause it to rebound in the second quarter. I think its just early to throw light on it.

Derek Leckow - Barrington Research

Okay. And then on the operating expenses, you mentioned that, you had a little bit unusual higher expense in the first quarter related to acquisitions and also to the show itself. But just wondering if you think it's still reasonable to expect operating margin to be relatively flat with last year or should we think about that as being a little bit more of a some of the investments you're making, would that lead that to be little bit lower than last year on a ex-precious metals basis?

Bill Jellison

Derek, this is Bill. I think that from an operating margin perspective, I think it's realistic to expect that the acquisitions that we have completed already will have a drag on our operating margin late this year, probably not quite to the same level that it was in the first Q but I think they will still have a drag.

I think as far as our overall business is concerned, with the volume down in the Q1 that obviously puts more pressure on it also from a favorable mix perspective. So, in general I would say that we were probably on our base businesses not too far off from kind of relatively flat excluding the acquisitions and I would say that in this kind of market environment that's probably more of a realistic expectation than to think that they will expand.

Derek Leckow - Barrington Research

That's what you applied in your new guidance, right?

Bill Jellison

Yeah.

Operator

Our next question is from Jeff Johnson with Robert W. Baird.

Jeff Johnson - Robert W. Baird

Thank you. Good morning, guys.

Bret Wise

Good morning Jeff.

Jeff Johnson - Robert W. Baird

I’m wondering if we can talk about the de-stocking issue a little bit more. From a geographic standpoint last quarter it sounds like in the US that maybe 400 or 500 basis points, I think if I remember the last call correctly, have we worked through at least the majority of that in the US and this quarter it was maybe more a little biased towards Europe or the rest of the world and how do we think about that going forward?

Chris Clark

Yeah, Jeff, it's Chris. I would say that what we saw on the first quarter, we saw a broader impact outside of the US than the US whereas in Q4 really it was more focused on the US dealer inventory contractions. I think I would characterize it saying, while we certainly see some -- many if not many if not in most geographies, the fact is that it was far more spread out this time around and particularly in the developing world, some in Europe and frankly some in other developed countries. So, I would characterize it as pretty broad.

Jeff Johnson - Robert W. Baird

And, Chris, the risk profile I guess over the next quarter or two of inventory stocking really taking the number down dramatically, would you characterize that as high, low, just the very near term acute impact that could potentially have?

Chris Clark

Yes, I guess I would say, Jeff, that looking at it, there's a fair amount of inventory in the channel at any given point in time and as our customers both at our dealers as well as in end user level look at it and manage their cash. Quite frankly they are going to end up in a scenario where they may choose to take – and try to take inventories down and I think that we have certainly seen it the last two quarters.

I don't think we can really predict in terms of what's going to happen moving forward with a whole lot of granularity particularly given the broad geographic base and the fact that we don't have visibility to a lot of our customers in terms of inventories. But I would that what's happened has been – it has been, I think relatively indicative of what could happen in an economic downturn and again because of that it may very well could continue here for a little bit.

Jeff Johnson - Robert W. Baird

Sure, okay understood. And then Bret, I guess on the non-dental side and the small equipment side, could you give us just a historical perspective of what those businesses maybe had been growing? And do we think of that as a one to two quarter type impact here and I know the small equipment especially is going to be hard to predict but I'm not sure on the non-dental side, that I quite understand the dynamics well enough to know how to think about that over the next few quarters?

Bret Wise

I think the non-dental side, you need to think about it being tied more to industrial-type businesses, which are, more commodity driven and thus, for instance, one of the businesses served through that segment for us is the jewelry business, which is way off at this point. So it has the likelihood of reacting more significantly to an economic downturn than say a dental composite or a dental consumable.

And thus it's, I think, it's easier to say that it probably will continue to be down, for another quarter or at least until we see an economic recovery, a real economic recovery start to take place. So, at this time that's what my expectations are for that business, the point from our perspective, of course, is that it's small, it's only 3% of our mix.

Jeff Johnson - Robert W. Baird

Yeah, fair enough. And that is not included in the precious metals even though I know the golf clubs, the jewelry stuff are metals that's not included in your precious metals number?

Bret Wise

No it's not in our precious metals numbers.

Jeff Johnson - Robert W. Baird

All right fair enough and Bill, just a couple clarifying questions I guess, for you. How should we think about the net underlying going forward? Is it little bit bigger of an expensive quarter than we would have thought? Is that a good run rate going forward?

If you can also just update us on selling days, rest of the year if there is anything between the quarters we should be thinking about? And then I have one more question on the Zhermack that I will follow up here in a second?

Bill Jellison

Yeah. As far as the net interest in other category, I would say that we would expect that the interest expense, net expense category should continue to run favorable in comparison to last year. I would say it would have been probably running more favorable but for the fact that the interest income earned on our cash balances are significantly down. I mean, I think we are earning probably a full three percentage point less on our cash invested this year because of the significant drop in overall rates.

As far as the FX transaction side of the equation, that was actually more favorable to us this year because we had a bigger FX transaction loss in the first quarter of last year and moving forward from a projection perspective, we normally forecast in each of the quarters and for the remaining part of the year on the FX transaction side to be neutral, that there's no impact on at least our current year expectations because we don't know what the movement is going to be within a period, that could be a plus or minus.

But if you look at what that line did last year, I would say that it was probably not far off of kind of neutral in Q2 and Q3, but if you recall, we had, almost a $6 million hit in the fourth quarter for that last year, so we should run favorable to that in the fourth quarter.

Jeff Johnson - Robert W. Baird

Great. And then on the selling days issue and then I will just get the Zhermack question in there. So you say that ex the inventory step, the back out of the minority loss would have been maybe close to $%1 million instead of $1.8 million, but I'm assuming inventory there doesn't turn in one quarter, so should we continue that run rate to back out at about the one -- north of $1 million anyway for the next couple of quarters?

Bill Jellison

No. Almost literally almost all of that burnt off. I mean, there might be a couple of hundred thousand dollars max but, the large majority of that, 90% of that had already burnt off in Q1.

Jeff Johnson - Robert W. Baird

Okay, great. And just a follow-up there is, so if we drop that down to $1 million, but on the $1.8 million this quarter you said, typically we look at a non-GAAP number adjusting out inventory step up, those kind of things and I know you adjusted out to get to the $0.43 number, some acquisition stuff, but the $1.8 million is still in the minority loss line. I'm just trying to figure out if that $800,000 or so delta that was related to inventory step is backed out into the $0.43 number or how do I think about that?

Bill Jellison

Yes, that's not -- that $2.6 roughly million of roll-off is netted out and it's also got the minority interest piece. So the net number that we are backing out or adjusting to the EPS line is including DENTSPLY ending net impact of that.

Jeff Johnson - Robert W. Baird

Okay, great. And just again selling days, sorry to keep coming back to that if you could just step ups through the next three quarters, any difference in your overall selling days?

Bret Wise

Yeah. Jeff, this is Bret. I'll address that. I think the selling days in the next three quarters are pretty neutral to the prior year, meaning maybe it's a day or flat in each quarter. The one consequence that is probably not exactly equal is that Easter fell in April this year, whereas it fell in March last year. And it doesn't have such a huge impact in the United States, but the Europeans typically take several days off at Easter and thus that can have an impact in the second quarter this year, but absence that, I think the selling days are pretty equally.

Chris Clark

They are pretty equal. I think we are down one and one quarter and for everything else it's pretty flat, so.

Jeff Johnson - Robert W. Baird

Okay. Got it. Thanks, guys.

Operator

(Operator Instructions). And our next question comes from Yi-Dan Wang with Deutsche Bank.

Yi-Dan Wang - Deutsche Bank

Thank you very much for taking my question. I've got essentially three questions. First of all it would be great if you can give us the internal growth rate of your implant business in the US, ex-US and globally. I think you said, it declined slightly in internal terms. And then you commented that the decline you saw was, I think if I heard it correctly, largely due to destocking.

So it would be great if you can give us some sense of what percentage of your implant sales is from distributors versus direct market and to what extent destocking has affected you, how much of that or how much of the decline in the quarter came from that and what additional destocking do you anticipate would occur in the second quarter?

And my last question is, with regard to, I suppose, deferral of capital equipment purchases and increasing competition in the CAD/CAM dentistry area, how should we think about the performance of your CAD/CAM business in 2009 versus that in 2008? Thank you.

Bret Wise

I will try to run through those. It is a number of questions. Internal growth; our dental implant business includes implants, meaning the implant device itself and the abutment, which we kind of call the implant devices, includes some small equipment because there's some drills and so forth that go, and kits to go with the implants occasionally, includes bone growth products and more recently it includes drill guides.

In total the category was just slightly negative, meaning low single-digits negative. And that all occurred because of the developing countries, which are not a huge part of the mix but developing countries contracted somewhat meaningfully. So without developing countries, the developed countries were up low single-digits.

If you look at just the implant devices, meaning the implants plus the abutments, those grew more robustly, kind of mid single-digits in the US, low to mid-single-digits in Europe and of course as I said they contracted in the developing countries.

In the developed countries we typically take implants direct. So in the US and Japan, and in most European countries; in Australia, in Canada, etcetera, we are direct. In most other countries, we have some form of distribution and thus the effect on our mix is, maybe -- I don't have that number with me now, but I would say maybe 15% to 20% of our mix is through distribution, of that.

What additional destocking will happen in the implant category in Q2, we have no idea? We just don’t have insights into those developing countries and what those dealers might do in the next three months.

And deferral of capital equipment, I think, we don't have a lot of capital equipment. The entire equipment category for us is only 10% or 11% of our mix and most of that is small equipment. So the larger equipment CAD/CAM is a fraction of that and I would expect some deferral or slowness of heavy equipment for the next few quarters, although as Chris mentioned, we just launched a new CAD/CAM unit, which had a lot of interest at the IDS so it's possible that in fact that will pick up when that's launched, which probably won't be until late Q2, early Q3.

Yi-Dan Wang - Deutsche Bank

Thank you very much. That answered all my questions.

Operator

Our next question is from Greg Halter with Great Lakes Review.

Greg Halter - Great Lakes Review

Yes. Good morning.

Bret Wise

Good morning.

Greg Halter - Great Lakes Review

I was wondering if you could comment on your capital spending plan for 2009.

Bill Jellison

Sure. I would say that based on kind of what the overall dental market is looking like; we would probably say that our capital expenditures would be modestly down in comparison to 2008.

Greg Halter - Great Lakes Review

Okay. And I just noticed today that there was a story about the Harvard Dental School closed because of a possible case of swine flu. I know it's early here and maybe this is overblown but just wanted to get your read on what's happening with dental offices given the situation?

Bret Wise

Well, it's a good question, Greg, although I don't have very good insights into what might have or might not be happening. We haven't heard anything from the ADA, we haven't heard anything from the government with respect to dental practices.

The news about Harvard Dental School frankly is news to me this morning. I haven't seen that announcement yet. Certainly, dental practices are a place where people do congregate and so forth, but I would say in addition to that, it's probably one of the places where we have best infection control and practices.

So, at this point I guess I would not expect an impact any greater than what we might see elsewhere in the economy from this flu season, if in fact it gets worse. But I must say that there's not a lot of data or indicators out there for us to rely on at this point.

Greg Halter - Great Lakes Review

Okay. Thanks.

Operator

Our next question is from [Heidi Laurents] with George Weiss.

Heidi Laurents - George Weiss

Oh, hi, Bill. Can you hear me?

Bill Jellison

Yes, I can.

Heidi Laurents - George Weiss

How are you doing?

Bill Jellison

Very good. How are you?

Heidi Laurents - George Weiss

Good. Just a question on the non-dental business. Can you just breakout for us how much that's contributed to your internal growth metrics over the past year?

Bill Jellison

Yeah. I mean, non-dental has actually been not having much of an impact over the last year. I would say it's literally, maybe a little bit more in the Q4 of last year but it's literally just impacting it now and it's because the industrial side. So the industrial piece has actually performed relatively well for us last year, but, obviously, it's a different story in this environment and I would expect that at least in the first half of the year that it will probably have the same level of drag.

Heidi Laurents - George Weiss

Okay. So but in the past, can you break out how much it's actually contributed to that your overall?

Bill Jellison

I would say it probably didn't change it by more than probably a tenth of a whole point or so in comparison.

Heidi Laurents - George Weiss

Okay.

Bill Jellison

It's been growing pretty similar to what our overall dental business had been growing.

Heidi Laurents - George Weiss

Okay. Great.

Bill Jellison

It's just that there was a wide swing this quarter, which is why it made such a big difference.

Heidi Laurents - George Weiss

Okay. And any commentary on just overall pricing in the market right now?

Bret Wise

I think that it's a little bit difficult to tell, Heidi, in terms of where things will settle out. We took a price increase obviously in across most of our lines later last year and at Q3 in some cases in Q4. We are finding that in some cases, we are having to increase promotional activity, in light of the competitive environment in order to maintain volume. But I would say it's really too early to tell will all of the price increase -- will some of the price increase stick. My guess is we'll get a little bit of it but we're also having to spend some of that back.

So again it will vary depending on the market and the product category, but we are still finding some opportunities to take price and we actually had a couple of businesses that took incremental price this past quarter.

Heidi Laurents - George Weiss

Okay. Great. Okay. Thanks so much. Oh, you know what? Just last question also, just on the impact you're seeing on the private label side of your business. I know it's sort of tied to pricing also?

Bret Wise

Sure. Well, Heidi, this is Bret. We do sell a few products private label but not many, so I don't think we are seeing much of an impact at all there. There had been reports of some dealers promoting private label over branded products in the last several months or so, but that seems to have died down at this point. So at this point we would say we are probably not having much of an impact from private label at all.

Heidi Laurents - George Weiss

Okay. Great. Thanks so much, guys.

Operator

Our next question comes from [Adam Prusard] with Barclays Capital.

Adam Prusard - Barclays Capital

Good morning, guys.

Bret Wise

Good morning Adam.

Adam Prusard - Barclays Capital

Just most of my questions were asked but want to follow up on the acquisition environment. I guess, the difference in price closed recently and what I guess maybe some areas of interest for you guys?

Bret Wise

Well, we continue to be interested and active in evaluating acquisitions. I would say the pipeline today is about what it was, mid, late last year. Timing risk is always significant when speaking of acquisitions but I would say we will probably be active in 2009, similar to what we were in 2008 where we completed five transactions and I think we had five also in 2007.

So we have very strong balance sheet, good cash flow, lots of liquidity from the banks and I think we are in pretty good shape to execute transactions if we can negotiate them at prices that make sense to us.

Adam Prusard - Barclays Capital

I think last question for Bill, just underlying currency expectations for the full year and then that 4% to 5% acquisition contribution, is that still the same for February?

Bill Jellison

Yeah, I think if you look at the FX expectations moving forward here that, we ended up, you know, close to 7% negative top line in Q1, I think that that will still be pretty high in Q2 and Q3, a little bit better than that in Q4. So in the whole year we will be probably a little bit better, in general on the top line side if rates stay where they are now. But I would say that the general impact as well as on the EPS side will continue at about that level, again, unless current FX rates, change from where they are.

Adam Prusard - Barclays Capital

And the four to 5% from acquisitions?

Bill Jellison

And the four to 5% from acquisition should still be a reasonable level for the whole year.

Adam Prusard - Barclays Capital

Thanks a lot, guys.

Operator

Our next question is from Elan Chaitovitch with Redburn Partners.

Elan Chaitovitch - Redburn Partners

Good morning, this is Elan Chaitovitch from Redburn Partners in London.

Thank you very much for taking some questions. Three questions on your dental implant business. I am just wondering if you could give us some color on pricing that you are seeing in your dental implant business year-on-year in Q1?

The second question relates to the impact of low pricing competitors and if you are seeing any shift away from your business from towards those lower priced competitors in your dental implant business?

And the final question relates to your quite impressive growth rates in your dental implant business, which are way above what most -- well pretty much all the other reporting companies have come out with and I was wondering if could you give us a bit of color in terms of where you are seeing the strongest growth and what you think is driving that growth?

Bret Wise

Okay. Let me start with pricing in Q1. I would say we haven't seen any significant change in pricing in Q1 from our perspective. We haven't been promoting the implants heavily or discounting heavily and we haven't seen a lot of that from competitors. We have seen it a little bit in certain local markets but not broad based.

Likewise, I don't think we have seen much of an impact from low pricing competitors in the developed world. As I mentioned before, our implant growth was down the most in the developing countries where, of course, there's been a 20% to 30% price increase for them on our implants just because the currencies have weakened.

And in those countries, we see slower sales from ourselves, we think that the dealers are reducing their inventories, but in those markets it's possible that the low price implants are taking share because they are low priced and many times they are manufactured in that currency rather than imported from a US dollar or a Euro based company.

Our own implant growth, I think is driven by innovation and the product mix we have. We have got a couple of brands in implants that I think are gaining in popularity and we have been doing a lot of marketing to help promote those, including key opinion leader support.

We have got a product, a tissue care product, it's called ANKYLOS, which we think is very good for getting the tissue to return to close to the implant and thus you don't have some of the negative effects if bone were to, move away from the implant where the abutment joins it and that's gained in popularity. So, I think overall our growth is being driven by good products and good marketing.

Elan Chaitovitch - Redburn Partners

Thank you very much.

Operator

Our next question is from Gary Hatton from Granahan Investments.

Gary Hatton - Granahan Investments

Hi, good morning.

Bret Wise

Good morning.

Bill Jellison

Good morning, Gary.

Gary Hatton - Granahan Investments

I was just curious just following up on that implant business. Do you have a sense of what the implant market actually grew at during the quarter?

Bret Wise

Well. Its anecdotal question, it's probably based on the same information that is in the public domain. I mean, we have looked at the announcements of our competitors and several of them have seen contractions kind of double-digits, kind of the 10% range.

Others have been closer to our own growth so. S o we think if you average it all out, it's probably mid single-digit down right now. It would be our best guess.

Gary Hatton - Granahan Investments

So, obviously you're gaining some share and you just mentioned kind of why you think you are, but is there anybody else out there you think is gaining share?

Bret Wise

Well, I mean, there's others out there that have announced relative growth that's higher than their competition, so by definition I think those people are gaining share.

Gary Hatton - Granahan Investments

And just one other question on dental office visits. Do you have a sense of what that was down in the quarter?

Bret Wise

Well, no. There's no real strong evidence of that. For instance, we don't have a broad -- there is 150,000 dentists or so in the US alone and we don't have really broad-based surveys.

Gary Hatton - Granahan Investments

Okay.

Bret Wise

What we do have is surveys of 100 dentists here, 100 dentists there and it looks like their appointment books have a few more holes in them than they did maybe a year ago when the economy was stronger. But it's anecdotal to us and that makes sense that there would be some reduction in office visits and to the extent we can --- we've asked our own customers it seems to be there's been a modest decline.

Gary Hatton - Granahan Investments

And then just last one on the orthodontic side, are you seeing --what kind of volumes are you seeing on that side?

Bret Wise

Our orthodontics business has been relatively strong. It is the fastest growing business we have on an internal growth basis right now and that's mainly a developed market business for us. So, the specialty businesses in total groove and it was the strongest of the three.

Gary Hatton - Granahan Investments

Okay. Thank you.

Operator

Our next question is from John Venusti with Kynikos.

John Venusti - Kynikos

Yes, hi, good morning. Just a couple of quick questions for you, because most of my questions have been answered already. On the IDS show, can you give us any idea about what the expenses were that were associated with that show in the quarter?

Bret Wise

Bill, do you have a good estimate?

Bill Jellison

Sure. I think keep in mind it's probably in the $2 million to $4 million range in general is what we would be spending, but when you look at that, you have to keep in mind that, that show takes place every two years and that in years that show does occur, we have other types of expenses that we cut back on within those same periods. So, if you are looking at it from an incremental perspective, it would be a different story than that.

John Venusti - Kynikos

Okay. I mean, can you give us some color on that?

Bill Jellison

I would say , I mean, I would say realistically probably you should be reducing that number by about half anyways. In comparison to spending that would have been reduced specifically in years that generally occurs.

John Venusti - Kynikos

Right. And that's all recognized in the quarter, right?

Bill Jellison

That's all in the quarter, that's correct.

John Venusti - Kynikos

Okay. Thank you. Also was there any FX impact on the operating margin line?

Bill Jellison

Sure. There's FX impact in each one of the different component areas. I mean, the overall impact for us as I mentioned is about $0.03 negative within this period. And I would say on the operating income, end of the equation, that that's obviously the bulk of that number.

John Venusti - Kynikos

Right okay good I missed that $0.03 thing. Thank you very much.

Operator

You have a follow-up question from Jeff Johnson with R.W. Baird.

Jeff Johnson - R.W. Baird

Sorry, guys. Just the acquisition question was my follow-up and it's been answered. Thank you.

Bret Wise

Okay. Thanks, Jeff.

Operator

At this time we have no further questions so I would like to turn the conference back over to Mr. Wise for closing remarks.

Bret Wise

All right, thank you, Camille. Well, thank you everyone for joining us this morning and for your continuing interest in DENTSPLY. As noted today, we have faced slightly slower market here in early 2009, which we believe will probably continue in some form throughout 2009.

We have been working hard as Chris noted to balance our fixed and our variable cost structure to adapt to this environment and we are comfortable with our capabilities to continue to adapt to it as we move through the year.

We have a strong balance sheet, a good cash flow model and we are confident with our position and believe we can easily weather this storm and perhaps come out the other side of it with an improved position going forward. So we look forward to updating you on our progress as we move through 2009. Thank you.

Operator

Replay information for this call can be found on DENTSPLY's website. That concludes today’s conference. Thank you for your participation.

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Source: DENTSPLY International Q1 2009 Earnings Call Transcript.
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