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DENTSPLY International Inc. (NASDAQ:XRAY)

Q3 2009 Earnings Call

October 29, 2009 8:30 am ET

Executives

Bret W. Wise - Chairman and Chief Executive Officer

Christopher T. Clark - President and Chief Operating Officer

William R. Jellison - Senior Vice President and Chief Financial Officer

Analysts

Derek Leckow - Barrington Research

Jeff Johnson - Robert W. Baird & Co.

Adam Prusard - Barclays Capital

Greg Halter - Great Lakes Review

Chris Arndt - Select Equity Group

Operator

Good day everyone, and welcome to the DENTSPLY International 2009 third quarter earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Bret Wise, the Chairman and Chief Executive Officer.

Bret W. Wise

Thank you for joining us on our third quarter call. This is Bret Wise, Chairman and CEO, and also with us today are Chris Clark, our President and COO, and Bill Jellison, our Senior Vice President and CFO.

I’d like to begin today’s call with some overview comments on the results and also how we see the state of the dental market. I’d ask Chris Clark to follow with some insights on our gross margin performance, and then as usual, Bill Jellison will follow with more details on the financial results. And as usual, following our formal remarks, we'll be pleased to answer any questions that you may have.

Before we get started, it is important to note that this conference call will include forward-looking statements. Those involve risks and uncertainties, and they should be considered in conjunction with the risk factors and uncertainties described in our most recent annual report on Form 10-K, and our other periodic filings with the SEC. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. A recording this conference call in its entirety will be available on our website.

Last night we announced our financial results for the third quarter and we’re pleased to announce improved sales performance, a solid overall earnings result, and as we’ll discuss today, excellent free cash flow generation. These results continue to suggest that we may have seen the trough in the global dental market with some signs of gradual recovery as we move forward. Total sales including previous metals were up 0.2% in the quarter, and sales excluding precious metals increased 1.1% in the quarter, and that’s a significant improvement from the minus 5.6% and minus 6.2% that we experienced in the first quarters of this year.

Internal growth was minus 1.5% in Q3, and that’s also a strong improvement over the -3.8% that we had experienced June year to date. Acquisition growth was 4% in the quarter, resulting in constant currency growth of 2.5% for the period, and the currency impact while still negative at minus 1.4%, represented a significantly smaller headwind in the quarter than we had seen in the first half of the year. Further, if rates remain where they are today, currency will turn into a positive tailwind in the fourth quarter.

Our dental business delivered basically flat internal growth. It was minus 0.3% in the quarter, and that also is a significant improvement over our June year to date performance which was minus 3.0% for the dental only portion of our business. In total, these results are encouraging, indicating at least a stabilizing if not a strengthening of the underlying dental market as well as continued strong execution I think on the part of our business units.

Encouragingly, our Q3 internal growth improved across all three geographic regions. The US internal growth for the quarter was minus 2.6%, and that compares favorably to the minus 3.5% that we had seen June year to date, and that was driven by stronger consumable sales and also solid double digit implant growth in the US. Internal growth in Europe was minus 1.1%, and again that compares favorably to the minus 2.5% we had seen June year to date, and I think it’s also important to note that European growth was positive in the low single digits if you exclude CIS, and that was led by particularly strong growth in our specialty products where all three were positive on an internal growth and of course a constant currency growth basis in the quarter.

Rest of world sales also strengthened in the quarter, delivering flat internal growth in Q3, and that compares favorably to a minus 1.9% that we had seen through June. So I think these geographic results reflect meaningful improvement over what we had seen in the first half of the year providing some comfort that the stability of recovery is not limited to one region or one geography, but it’s more widespread at least at this time.

Looking at the performance of the various product areas of the business, our specialty businesses as a group again reported low single digit internal sales growth in the third quarter and mid single digit constant currency growth. This is consistent with a trend we have seen all year as our specialty business growth phases in each quarter in 2009.

In the specialty category, both orthodontics and endodontics had positive internal growth while implants were essentially flat on an internal growth basis during the period. So these were positive constant currency. I think what is interesting in this segment is that our implant business now appears to be very close or perhaps even tied to the number three global position for the implant market. You may recall that just a few years ago we were number five in the world in the implant market, and I think that’s an indicator that we’ve made substantial progress in this marketplace across a variety of geographies.

Moving to the dental consumables category, it was flat during the quarter on an internal growth basis and positive mid single digits on a constant currency basis. I’d add that this is a pretty substantial improvement over what we saw in the first half of the year for the dental consumable as they go through distribution. Sales in the lab segment were negative mid single digits on an internal basis and low single digits on a constant currency basis, and I think this demonstrates a continuation of what we’ve seen which is that the lab segment is the area under the most pressure as we work our way through the economic downturn, and that’s due in part to patients downgrading to lower cost procedures.

Overall, we believe these results are stronger than what is probably a slightly improved underlying market, indicating that we’ve probably taken market share during this period. Our earnings per share in the third quarter were $0.45 on a GAAP reported basis, and that’s up 2.3% from the $0.44 we reported last year. On the non-GAAP basis, so excluding restructuring and other charges and tax adjustments, earnings were $0.44 a share in the third quarter this year, down 4.3% from the $0.46 we reported last year.

I would remind you that in the first three quarters of this year we’ve been going up against some very strong results in the prior year, actually record results in most of the quarters. Q3 2008 was no exception as we had internal growth last year of 5.4% and non-GAAP earnings per share growth of almost 18% in Q3 last year. So given this rather high fertile of a comparison, I think that the performance we saw in the current environment was very solid.

Our business continues to experience some gross margin pressure due to currency translation, mix, and lower cost absorption across our plants; however, we’ve done a good job of controlling discretionary cost to somewhat offset that impact on the operating margin line. During today’s conference call, both Bill and Chris have further discussion of margins in their prepared remarks.

Given the economic pressures that we face here today, we’ve been very focused on cash flow generation. During the third quarter our operating cash flow was very strong at $130 million which is a substantial improvement over the $98 million last year. Year to date, our operating cash flow is now up approximately 4% compared to the first three quarters of 2008, and I think this is a good indictor that our businesses are being very diligent, they’re paying a lot of attention to fundamentals of the business as we work our way through the global recession. Looking ahead, we continue to be cautiously optimistic about the market recovery; however, we need to recognize that the recovery will likely be a slow and steady process with both forward and backward steps along the way. The implications for our business is that we expect to remain very focused on controlling costs and prioritizing specific focus programs that will accelerate our growth as the recovery emerges.

Given some of the positive opportunities that we’re seeing at this time, we do expect to start some additional investments in the fourth quarter that will likely add about $0.01 per share to our costs in that period.

As we look at the fourth quarter, we seen an opportunity to meet or exceed last year’s fourth quarter performance, both in terms of sales and our non-GAAP earnings per share. We expect to have positive internal growth and positive impact from both our already completed acquisitions as well as currency. As we mentioned, we do expect some continued gross margin pressures, and again Bill and Chris will talk about it further, and we’re going to be making some investments in the fourth quarter in sales and marketing, and again that’s to the extent of about $0.01 a share.

Based on these expectations, we’re narrowing our full year guidance to $1.81 to $1.86 per diluted share, and again that’s measured on non-GAAP basis, and this implies EPS gains in the fourth quarter from 2% to 13%. Again, our assessment is that the overall dental market has stabilized and in some cases has begun to improve. Our sales and earnings expectations that we’re expressing here are based on our belief that these trends will continue as we move through the remainder of 2009.

I'd now like to turn the call over to Chris Clark.

Christopher T. Clark

I'd like to take a few moments and give you some insights into our performance and actions in the gross margin area as well as an update on a couple of key new product introductions that should provide us solid growth platforms as we move forward.

Our gross profit in the quarter was 55.3%, about 200 basis points below our rate in the third quarter of 2008. This rate reduction is being caused by three primary issues. First, foreign exchange transactions are roughly a third of the variance, primarily as a result of the strong Japanese yen and also from changes in the European rates. As you recall, we source a fairly significant amount of product out of Japan and Europe for other markets.

Second, unfavorable mix, partially offset by favorable price, created approximately half of the year-over-year margin rate gap. Mix from recent acquisitions caused roughly a quarter of this net unfavorable mix. And thirdly, reduced manufacturing volume and absorption contributed approximately a quarter of the year-over-year impact. This was the result of lower production during the period which drove inventories down in the quarter by over $8 million in constant currency compared to a billed of $15 million last year. However, it also resulted in lower overhead absorption and higher yield cost in the period as well as in higher product cost captured in inventory at the end of the quarter which should roll off in the fourth quarter.

Providing a bit more color on each of these factors; currency is obviously the most unpredictable issue and difficult to manage in the short term. With respect to the mix and price impact, we believe our non-acquisition mix issues will improve as the economy improves, and our specialty businesses in certain regional areas grow at a faster pace. I would also emphasize that our analysis continues to indicate that we have realized favorable net pricing over prior year, at least equal to our normal rate of increases. Even after adding incremental promotional efforts that had been implemented during the current climate.

Finally, as we look to our manufacturing variances and our recent under-absorption of overhead, we believe this should also improve as the dental market strengthens. As I have mentioned in the last couple of conference calls, we have been actively reducing our fixed cost basis while tightly controlling our variable expenses. We have initiated multiple restructuring efforts this year at many of our locations including a number of our manufacturing plants. Our approach in this area however has been balanced as we have been careful not to remove infrastructure that will be needed to respond to increased demand as the economic situation stabilizes and improves. As such our Q3 results reflect the positive impact of many of the savings efforts we have initiated earlier this year, but also reflect our decision to maintain our ability to accelerate production in the coming months to respond to any increased demand. We continue to be confident this balance prudent approach, and we believe that this impact on our margin will be minimized as the dental market improves and production levels increase allowing our capital to be more fully utilized.

I would also like to highlight early results from a couple of key new product introductions as innovation continues to be a solid growth driver for us. On last quarter’s call I briefly mentioned our August introduction of SureFil SDR posterior bulk-fill flowable composite. This product allows for excellent cavity adaptations and bulk fill placements upto 4 mm in depth and results in up to 30% less placement time for the dentist. Importantly this unique chemistry employs a new stress decreasing resin system that addresses one of the primary causes of procedural failure for composites; namely, stress accumulation during curing. In the first two months over 5000 US dentists had purchased the product which reflects an extremely strong level of early adoption. We’re very encouraged by customer reaction to the technology and continue to believe that this will really begin to redefine the direction of the key categories composite restorations, again, based on the importance of stress reduction.

I would also like to comment briefly on the European launch of the Cercon Brain expert which is our next-generation Cercon CAD CAM system that has expanded applications and also improved operating efficiencies for the lab. Shipments of this product also began in August and we’re very encouraged by initial results. As we look to the fourth quarter we anticipate expanding the launch to include the US, Canadian, and Japanese markets as well.

I would now like to turn the call over to Bill Jellison, our Chief Financial Officer, to discuss the third quarter financial results in greater details.

William R. Jellison

Net sales for the third quarter of 2009 increased by 0.2% in total and increased by 1.1% excluding precious metals. The sales increase excluding precious metals for the quarter included a constant currency increase of 2.5% which includes a 1.5% decrease from internal growth and a 4% increase from acquisitions. The quarter was also negatively impacted 1.4% from foreign exchange translation. The geographic mix of sales excluding precious metals in the third quarter of 2009 included the US at 40.2%, Europe represented 38.3%, and the rest of the world was 21.5% of sales. Our non-dental business had a negative impact on internal growth once again of approximately 1.2% points in the period. We also believe that our internal growth in the quarter was negatively impacted by approximately 0.5% to 1% points from dealers buying less product ahead of our price increases this year compared to last year.

Currency rates had less of an impact on sales and earnings in the quarter than they did in the first half of this year as the dollar weakened further in the period against most currencies. Based on current currency rates, foreign exchange will have a positive impact on sales in the fourth quarter. Gross profit margins as a percentage of sales excluding precious metal content in the third quarter of 2009 were 55.3% compared to 57.4% from the third quarter of 2008. The rate was negatively impacted in the quarter compared to the same period last year by a number of factors as Chris discussed in detail. We expect that many of these factors will continue to impact margins in the fourth quarter as will the higher cost captured in our inventory which are expected to roll off in that period.

SG&A expenses were $178.8 million or 36.2% of sales excluding precious metals in the third quarter of 2009 versus 37% in the prior year’s third quarter. These expenses were not only lower than those in last year’s third quarter on a constant currency basis despite acquisitions, but they were also lower when measured as a percent of sales. In fact, on a constant currency basis, excluding acquisitions, these expenses were down in the mid single-digit range. Expenses continue to be tightly controlled as we work to not only bring down discretionary costs, but also to reduce various fixed expenses to maintain an appropriate balance in a difficult economic environment.

Operational margins for the quarter were 17.5% compared to 15.3% in the third quarter of last year. Operating margins on sales excluding precious metals were 18.8% compared to 16.6% last year in the period. Operating margins based on sales excluding precious metals for comparative purposes excluding the recent acquisition related activities and restructuring and other costs in both periods would have been 19.1% in the third quarter of 2009 and 20.4% in 2008. Approximately one-third of the rate reduction in the period is from the impact of recent acquisitions. The remaining impact is primarily resulting from lower production volumes, negative FX impacts, and a negative product mix as Chris commented on in more detail earlier.

Net interest and other expense in the third quarter was $5.1 million compared to $5.6 million last year in the third quarter. Net interest expense was essentially flat in the period as lower interest income on investments was offset by lower interest expense from the lower rates and borrowing levels. Other expenses were reduced slightly also in the period.

The corporate tax rate in the quarter was approximately 26% and we expect this to be a reasonable assumption for an operational tax rate for 2009 and this year’s rate is approximately the same as 2008’s full year operational tax rate. Keep in mind however that the operational tax rate in the fourth quarter of last year was only 22%; so it will be a headwind of approximately $0.02 to $0.03 per share for us in the fourth quarter.

DENTSPLY’s net income in the third quarter of 2009 was $67.5 million or $0.45 per diluted share compared to $66 million or $0.44 per diluted share in the third quarter of 2008. Net income on an adjusted non-GAAP basis excluding acquisition related costs, restructuring and other costs, interest income from the initial fair value measurement adjustment and income tax related adjustments was $55.9 million dollars or $0.44 per diluted share in 2009 compared to $69.3 million or $0.46 per diluted share in the third quarter of 2008.

Cash flow from operating activities in the third quarter was $130 million compared to $98 million in the third quarter last year. Cash flow from operating activities for the first nine months of 2009 was $245 million, and cash flow improved over last year as working capital needs were less this year and inventory was actually reduced on a constant currency basis in the first nine months of this year. Capital expenditures were $43 million in the first nine months of the year with depreciation and amortization at $49 million in the first nine months. Inventory days were 106 at the end of the third quarter of 2009 generating $23 million of a positive cash flow swing in the quarter as inventories were reduced compared to the same quarter last year. Inventory decreased in the period through some solid efforts and we see further opportunities to reduce them further. Accounts receivable days were 61 days at the end of the third quarter of 2009 compared to 59 days at the end of the third quarter of 2008 and 54 days at the end of 2008. We continue to believe our accounts receivables are in good shape considering the global economy and we remain focused on them.

At the end of third quarter of 2009 we had $333 million in cash and short-term investments. Total debt was $395 million at the end of the third quarter. We also have recently completed a $250 million private placement note to be funded no later than January 19, 2010, with an average maturity of 5 years and a final maturity of 6 years at a fixed interest rate of 4.11%. This note was entered into to take advantage of low fixed-rate financing in this environment, to have some specific funds to pay off a $150 million private placement note that comes due in the first quarter of 2010, and to have additional flexibility as we renew our revolving credit facility next year.

At the end of the third quarter, the liabilities under the $150 million private placement note and $63 million of borrowing under the revolver are classified as current maturities as those instruments expire in March 2010 and May 2010 respectively. However, the new private placement note will replace these borrowings upon their retirement and of course we will renew the revolver prior to its expiration.

Year-to-date we have repurchased approximately $21 million of our stock or approximately 700,000 shares at an average price of roughly $29. Based on the company’s authorization to maintain up to 17 million shares of treasury stock, we now have approximately 2.6 million shares still available for repurchase.

Finally, as Bret noted, our 2009 full year earnings per diluted share guidance of $1.81 to $1.86 on a non-GAAP basis excluding restructuring and other costs, recent acquisition related activities, and income tax related adjustments.

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

Question-and-Answer Session

Operator

Today’s question-and-answer session will be conducted electronically. (Operator Instructions). We will take our first question from Derek Leckow - Barrington Research.

Derek Leckow - Barrington Research

A question on the internal growth commentary here; just want to make sure I got these numbers right; I think you said that the implant business was positive outside the US, but negative inside the US; is that the right interpretation of that?

Bret W. Wise

No, I am sorry, that’s how it came across, but the implant business on an internal growth basis was essentially flat worldwide. It was positive in the US, very strong in the US actually, double digits; it was positive in Europe, including CIS, but of course it was more positive excluding CIS, and thus because it was flat for the whole world, you can imply from that the rest of the world regions it was negative, particularly the developing countries.

Derek Leckow - Barrington Research

Is that something market related you think; are you still gaining market share in those markets?

Bret W. Wise

I think we’re clearly gaining market share in the US and Europe. There is not real great data on the rest of the world locations because we really don’t get sales by country from the competitor filings and nor do they get it from us. So, I think it’s hard to tell on the rest of the world, which comprises about 20% of the market, but I think clearly in the developed countries, we’re still taking share.

Derek Leckow - Barrington Research

I have a question here on the gross margin pressure; it sounds like you guys did take a price increase, but it wasn’t as large as last year; is that right?

Bret W. Wise

Yes, that’s correct.

Derek Leckow - Barrington Research

Was it about a 2% point increase or what was the average?

Bret W. Wise

It was in that neighborhood Derek, pretty consistent with what we’ve historically taken. The price increase we took last fall was above that, but this is much more in line with what historical norms would be.

Derek Leckow - Barrington Research

So is it fair to infer that perhaps we saw some delayed purchases that would otherwise have been occurring in this quarter that may wind up actually occurring in the fourth quarter this year?

Bret W. Wise

I think, I don’t know that it’s delayed purchases Derek as much as it as our dealers probably didn’t buy inventory at a higher rate this year as they did last year. Meaning, they still bought ahead to get the pre-buy discount; meaning, the 2% or 1.5%, whatever it is, varies by product, but their buy-ahead was less robust than it was last year.

Derek Leckow - Barrington Research

Yes, and last year you had a pretty strong margin period in the fourth quarter; so I am wondering, should we expect to see some lift from that activity in the fourth quarter?

Bret W. Wise

On a gross margin basis I don’t expect that. I think last year’s fourth quarter got a lift from mix more than anything. So, I think as Bill commented on in gross margins and so did Chris, we expect that the fourth quarter will probably still be under pressure on a gross margin basis, particularly because of the higher costs sitting in inventory.

Derek Leckow - Barrington Research

Bret, your comments about the investments in sales and marketing; normally we see companies make those comments when they have pretty good visibility that things are improving and obviously that must be the reason why you decided that this is the right time to make those investments; can you tell us what you’re seeing out there and what your expectations are; any early preliminary comments on 2010?

Bret W. Wise

With respect to the investments, I think these are company specific opportunities, more so than they are broad market changes that are driving us. I don’t want to be telegraphed in too much detail what we’re contemplating, but for the company there are some markets or some opportunities that we think we need to take advantage of and that is going to require some additional sales and marketing investments that we’re going to make in the fourth quarter. As far as 2010 goes, I think it’s too early to comment on it. We’re going to start our planning cycle in the next week or so and it runs through December, and so our intention at this point is to give you guidance on 2010 on our, probably what will be, an early February call when we cover the fourth quarter.

Derek Leckow - Barrington Research

These investments; are they personnel primarily?

Bret W. Wise

They are personnel primarily.

Derek Leckow - Barrington Research

Any particular geographies for that?

Bret W. Wise

Yes, but I don’t want to comment on that.

Operator

We will take our next question from Jeff Johnson - Robert W. Baird & Co.

Jeff Johnson - Robert W. Baird & Co.

Just wondering a few things here; Bret you made the comment early in the call that you expect Q4 organic growth positive, I think we’re all hoping it would be; just to temp our expectations down a little bit here, should it be in the low single-digit range, and I know you don’t give guidance around that, but it’s pretty easy to look at those comps and think we could be back to a 5% growth rate in the fourth quarter.

Bret W. Wise

That’s a good question Jeff, and you’re probably not going to be satisfied with the answer I think; we’ve avoided doing internal growth guidance this year because of the uncertainty in the market and that’s proven to be prudent, I think, up to the third quarter, but as we look at the fourth quarter, we do see an opportunity to have positive internal growth given what we see today, and that’s a pretty big turn around compared to what we’ve seen so far this year. So, we’re not going to characterize it further than that other than say that it is an indication that our confidence level about moving to the fourth quarter has improved slightly versus the visibility we would have had earlier in the year.

Jeff Johnson - Robert W. Baird & Co.

A somewhat satisfying, I guess, answer. If I think about organic growth then in my mind where I’ve got it in, in the 2%, 3%, or 4%, somewhere in there, Bill, it sounds to me like gross margin and operating margin then, in the fourth quarter, still had to be down close to what they were down today; is that the balance to be thinking anyway whatever organic growth is up a few points, then margins are going to have to be down; 50 to 100 basis points again?

William R. Jellison

Keep in mind Jeff that we reiterated that the number that drags that Chris highlighted as well are still going to continue in the fourth quarter, plus we also stated that there are some costs that are captured in our inventory levels at this point that are ultimately going to roll off in the fourth quarter as well. So, I think that you will absolutely have some additional margin pressures in that period.

Jeff Johnson - Robert W. Baird & Co.

Bret, just bigger picture kind of conceptually, I talked to you about this maybe a month ago or so, but just want to go back to it, if we can get to kind of 2010 organic growth in the low single digit, that is 2% to 3%, somewhere in there, you still feel comfortable that 20 to 30 basis points of margin expansion you can deliver with a modicum of organic growth next year?

Bret W. Wise

Again, we’re pretty early in our planning cycle for next year, however, I will say based on historic models of the company, when we can get organic growth in that range or so, we do a pretty good job getting drop-through, and thus that’s why we have that 20 to 40 or 20 to 50 basis points per year target, and at this point I would say we’re not moving away from that.

Jeff Johnson - Robert W. Baird & Co.

Yes, I’m just trying to think as it played off the yen strength especially and the impact that will have on the ortho businesses something different fundamentally in ’10 than maybe in past years that’s been.

Bret W. Wise

The yen is always an issue, the euro is going to be an issue but there’s lot of moving parts other than those and thus the guidance we’ve given in the past I think would still be the guidance we have today and we haven’t done the planning for next year yet.

Jeff Johnson - Robert W. Baird & Co.

Last two questions; you have a very nice bounce-back from an organic growth standpoint and my understanding is Russia is still somewhat of a disaster over there from a dental standpoint, so, when do we anniversary kind of what has been I think anyway probably down 20%, 25% for you guys in Russia the last couple quarters at least, when does that anniversary, and when it does, is there any reason to think that Europe doesn’t go back to positive organic growth probably even sooner than the US?

Bret W. Wise

The significant pressure in the CIS kind of started in the first quarter, so, I would say we’ll anniversary as we enter 2010, and as I commented today, Europe in total was down slightly by 1.1%, but without CIS it was positive low single digits, so, having CIS be neutral will be a significant improvement for our total European results and I think it would imply an ability to grow organically again in Europe. So, I think your thesis there is probably right.

Jeff Johnson - Robert W. Baird & Co.

And then last question just on the acquisition pipeline, obviously a dearth of deals here, just probably more on the target side not wanting to sell at a bottom or something, but now that the economy seems to have picked up a little bit and at least public company valuations are back up to somewhat respectable levels, do you think that will be here on the target side of not wanting to sell at a bottom and staring to ease out at all of these deals?

Bret W. Wise

It’s always hard to predict and particularly predict timing on these sorts of deals. We have seen a couple deals done and one in particular on the equipment side of the business but we don’t participate in that side of the business, but I think as an indicator that maybe things are starting to move a little bit and we’re optimistic that we’ll get to participate in that industry consolidation, although again it is difficult to predict timing.

Jeff Johnson - Robert W. Baird & Co.

Can you qualify your acquisition pipeline at all at this point, good, bad, and different relative to last few quarters?

Bret W. Wise

Good.

Operator

We will take our next question from Adam Prusard - Barclays Capital.

Adam Prusard - Barclays Capital

Just want to clarify on Q4, just thinking of US, I know obviously last year it kind of moved away from the historical trend, we saw revenues sequentially up from Q3, Q4, would you expect maybe that historical trend to return this year?

Bret W. Wise

I think there is a better opportunity for that; last year we had a number of things that were putting pressure on the US sales including the pre-buy which we’ve already mentioned, we had a problem with our anesthetic stock last year which kind of took us out of that market for most of the fourth quarter actually, and given the fact that we feel like the economics underlying the dental market are going to be improving in the fourth quarter versus the third quarter or at least versus earlier in the year, and thus, I think there is a good opportunity that the historic trends might return.

Adam Prusard - Barclays Capital

Can you guys comment, are you seeing improvement in the small equipment side, what are you seeing there lately?

Bret W. Wise

Small equipment which was very negative in the first quarter kind of became neutral in the second quarter and I think it was neutral and maybe even slightly positive on the mix in the third quarters; so, that resistance to spend, most of our small equipment is $5000 or less kind of things you’d buy with the credit card, the reluctance to even spend that amount which we saw early in the year first quarter seems to have abated a bit.

Adam Prusard - Barclays Capital

So, consistent with other segments, you’ve definitely seen some improvement there?

Bret W. Wise

Yes, we have.

Adam Prusard - Barclays Capital

And then, a bigger picture Bret, now you have over 300 in cash on your balance sheet, just remind me kind of what your priorities are, acquisitions, buy-backs, or increase in the dividends, just your thoughts there?

Bret W. Wise

Actually you’ve got the order right. Our priority would be to reinvest in the business, either acquisitions or R&D, sales and marketing; secondly for share repurchases; and third would be the dividend.

Adam Prusard - Barclays Capital

And lastly, just a quick one for Bill, if we were to see currency to stay where it is, what would you estimate the currency contribution would be for the fourth quarter to earnings?

William R. Jellison

We don’t specifically talk about the earnings side of the equation, but I think what you should be expecting, if rates are staying kind of where they’re at right now that you’ve probably got a top-size that’s probably in the 4% to 6% range positive instead of negative.

Operator

We will take our next question from Greg Halter - Great Lakes Review.

Greg Halter - Great Lakes Review

Following on that foreign exchange commentary there, what kind of impact did FX have on your earnings in the third quarter?

William R. Jellison

Overall, on a broad basis, it was actually fairly flat including the translation and some of the transaction related sides of the equation offset a little bit by the net investment hedge slops that we’ve got out there; so, while we’d have probably more of a drag in the first part of this year, it actually became more neutral in the third quarter.

Greg Halter - Great Lakes Review

And with the number of selling days equal this third quarter versus the last and what does it look like for the fourth quarter?

Bret W. Wise

They were flat in Q3 and will be flat in Q4.

Greg Halter - Great Lakes Review

And do you anticipate any additional restructuring charges coming up?

Bret W. Wise

We do expect to have some modest restructuring charges over the next let’s say 5 quarters or so and they’re probably in line with the kind of size and magnitude that you’ve seen from us thus far.

Greg Halter - Great Lakes Review

And I noticed that your goodwill account was up about $40 million sequentially, can you discuss the reasons behind that?

William R. Jellison

I think that one of the things that you got to look at between the numbers you’re looking at there between December of 2008 and now is about 3 to 4 percentage point of that increase is all FX.

Greg Halter - Great Lakes Review

Bill, I think you had mentioned that your inventory was down, but I’m showing a $312 million versus $279, am I looking at something incorrectly?

William R. Jellison

Again you’ve got to take a look at the FX related aspect of it; on a constant currency basis it’s down and you’ll see it on our cash flow statement as well too that we’ve got about $8 million of a reduction in the quarter in comparison to a bill last year of around 15.25.

Greg Halter - Great Lakes Review

And is that the same case for receivables, the FX having an impact there?

William R. Jellison

Yes, FX has a big impact on that as well too. Most of those balance sheet items are impacted by somewhere in the 3% to 4% range from the end of the year until the end of third quarter.

Greg Halter - Great Lakes Review

And would that be true somewhat for cash and debt also?

William R. Jellison

Yes, it would absolutely be true for cash and a little bit on the debt side, not as much.

Operator

We will take our next question from Chris Arndt - Select Equity Group.

Chris Arndt - Select Equity Group

I think you mentioned in the quarter that the mix shift was negative, but you also mentioned that implants were flat and I thought you mentioned that endodontics and orthodontics were also reasonably good, so I just want to reconcile those two facts; if something was negative on the mix side, what was negative?

Bret W. Wise

Keep in mind instead of implants and endo growing significantly faster generally than our broader-based market and product lines by having it be flat that’s actually putting a negative drag on the overall mix; we’ve also got mix within some of our product line related categories as well too; for example, sales in the Russia areas are down in comparison to some of the other regions and then also Spain which has an unemployment rate of close to around 20% right now, actually has a higher margin level for us and those sales are also down.

Chris Arndt - Select Equity Group

And then, I’m sorry if I didn’t hear this correctly, but in terms of the internal growth numbers and you said 2.5% ex-foreign currency, ex-precious metals, and then the acquisition contribution was 4 percentage points, is that right?

Bret W. Wise

That’s right.

Chris Arndt - Select Equity Group

Okay, so organic growth you could say is negative 1.5%?

Bret W. Wise

Correct.

Operator

This concludes our question-and-answer session. At this time, I’d like to turn the conference back over to Bret Wise for any additional or closing comments.

Bret W. Wise

Thank you John and thank you everyone for joining us this morning and for your interest in DENTSPLY. Again, we’re pleased to note that the global dental market appears to have now stabilized and in some areas have begun to improve, we expect this modest improvement to continue through the remainder of the year and we look forward to updating you on our progress when we report our full-year earnings in February next year.

Operator

Thank you. That concludes today’s conference. Thank you for your participation.

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Source: DENTSPLY International Inc. Q3 2009 Earnings Call Transcript
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