DENTSPLY International's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.18.14 | About: DENTSPLY International (XRAY)

DENTSPLY International Inc. (NASDAQ:XRAY)

Q4 2013 Results Earnings Conference Call

February 18, 2014, 08:30 AM ET

Executives

Derek Leckow - Vice President, Investor Relations

Bret W. Wise - Chairman and Chief Executive Officer

James G. Mosch - Chief Operating Officer and Executive Vice President

Christopher T. Clark - President and Chief Financial Officer

Analysts

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated

Steve Beuchaw - Morgan Stanley

Robert P. Jones - Goldman Sachs

S. Brandon Couillard - Jefferies & Co.

Glen Santangelo - Credit Suisse

John Kreger - William Blair & Company

Steven Valiquette - UBS Investment Bank

Jonathan Block – Stifel, Nicolaus & Co.

Operator

Good day and welcome to the DENTSPLY International Fourth Quarter Year-End 2013Earnings Conference. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Derek Leckow, Vice President ofInvestor Relations. Sir, you may now begin.

Derek Leckow

Thank you, Lisa. Good morning, everyone. Thank you for joining us to discuss DENTSPLY International's fourth quarter and fiscal 2013 results.

I'm here with Bret Wise, Chairman and CEO; Chris Clark, President and CFO; and Jim Mosch, Executive Vice President and COO. We will have some prepared remarks and then we have allocated the balance of our time for your questions.

I hope you had a chance to review our press release issued earlier this morning. I'd like to point out that a copy of the release and a set of supplemental slides and the Regulation G information regarding non-GAAP financials are available for download in the Investor Relations section of our website, www.dentsply.com under the heading Events and Presentations.

I'd like to remind everyone that the Safe Harbor language and U.S. GAAP reconciliation contained in today's press release also pertains to this conference call. We may make forward-looking statements involving risks and uncertainties. These should be considered in conjunction with the risk factors and uncertainties that are described in the release and our SEC filings. It is possible that actual results may differ materially from the forward-looking statements that we make today.

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 of this call in its entirety will be available on our website.

With that I'd now like to turn the call over to Bret Wise. Bret?

Bret W. Wise

Thank you, Derek. Good morning everyone. Thanks for joining us here on our year-end call. As Derek noted I have some opening comments about the market and our performance, then I am going to turn the call over to Jim for an update on operational topics and then Chris will provide a deeper dive on our results.

I'd like to begin by putting some context around overall performance for 2013. We came into the year expecting or hoping perhaps that the global dental market would continue to accelerate as we moved through the year. At the same time we had several that we needed to execute, including numerous new product launches to come out in the year, completing the sales and marketing integration of our implant business and continuing the recovery of our orthodontics business.

As the year progressed it became clear that the market acceleration that we had expected or hoped for would not materialize, particularly in Europe and this created a barrier to hitting our growth goals for the year. Despite this we are pleased with our ability to execute on operating margin expansion, again overcoming the slow sales environment in Europe; we had some major headwinds from currency in that regard and also the Medical Device Tax that was implemented in the U.S.

On the implant integration, we completed the combination of the marketing units as planned but really encountered much more disruption than anticipated in Germany. In orthodontics our recovery progressed in what has become a very competitive and in many ways a disrupted market. All told we accomplished several key goals last year including growing cash flow generation but we fell short of our initial growth objectives at the start of the year.

On our actual results we finished the year at just under $3 billion in revenue, growth was lower than our long-term trend line due in-part to the slow conditions I mentioned in Europe but also due to the company specific matters that I also alluded to a moment ago. Gross ex PM came in at a positive 2.1% for the year and that comprised of constant currency growth of 2% with currency translation essentially being unchanged on a net basis across all our countries.

Internal growth for 2013 was positive 1.9% and that was comprised of positive growth in each of our geographic regions, the highest in the U.S. at a positive 3.8% while Europe was positive 0.2% and rest of world came in at positive 2.7%. On the 2.1% top line growth, we had adjusted earnings per share growth of a positive 5.9% that’s on stable to slightly improving operating margins and again that overcame this slower growth and the headwinds we had in Europe. This 5.9% earnings gain came on top of a 9.4% gain in 2012.

Shifting to fourth quarter, total growth [XTM] was a positive 1.5% with our internal growth a positive 0.8% and constant currency growth was a positive 1.1% and that's against a pretty difficult comp of internal growth last year in the fourth quarter of positive 5.9%.

In U.S. we had internal growth of 2.5%; up against the 5.9% comp in the prior year and rest of world we had internal growth of 2.5% against a 12.1% comp in the fourth quarter 2012. Europe had a negative 1.1% internal growth in the quarter but absent the German implant business where we had a tough comp because we are coming up against the pre-integration period last year. So absent the German implant business the European business was up low single-digits. On the 1.5% top line growth in the quarter, adjusted EPS was up 9% and that's on top of a 10% gain last year in the fourth quarter.

There are several moving parts in the quarter and Chris is going to cover those in more detail, but overall, I think this was a good earnings outcome even after considering a lower tax rate which mostly offset currency headwinds and again Chris will give you more of those details.

On market conditions, the U.S. market at retail was probably growing low single-digits in Q4 while we believe Europe was down slightly. In the U.S. our expectation is that economic growth should continue to accelerate in 2014 and the dental market should also pick up probably in the range of 100 basis points normalized for the impacts on the base line for the device tax in the U.S.

I would like to add that we have seen some weakness in U.S. early in 2014, which may be attributable to some pretty severe weather in the Midwest and East Coast and of course we hope that, that will level out over the coming months or over the first half of the year. In Europe, there's some interesting data points including some stability or even growth late in 2013 in the Southern countries of Europe which of course is an encouraging sign and we haven't seen for some time. Overall we are expecting dental markets to accelerate in EU also by about a 100 basis points or perhaps a little bit more in 2014.

In the rest of world territories for us, currency weakness is a major barrier present with numerous markets in those categories suffering material devaluations versus U.S. dollar euro and Swiss currency. As our rest of world territory is a generally import markets we view this as a risk and thus we are not expecting any significant acceleration in these markets overall in 2014.

Our building blocks for 2014 takes these market conditions into accounts but also a pretty solid innovation pipeline that we have coming into the year and of course an improved capital structure over what we had a year ago. We are also very focused on improving operating leverage of our business and generating operating margin expansion, improved asset turns and cash flow. Likewise we are also mindful of the headwinds we face from currency impacts for the next year.

Based on these factors in the aggregate we are targeting adjusted earnings in the range of $2.45 to $2.55 per diluted share for 2014 and we view this as a reasonable expectation given the points I have noted here.

I would like to now turn the call over to Jim for an update on some of our operational matters including innovation pipeline. Jim?

James G. Mosch

Thank you, Bret. I would like to comment on a few operational items and then turn it over to Chris for the financial review. Overall our primary objectives in operations have been on scientific research in combination with strong clinical evidence which supports our commercialization of innovation. Ultimately this drives better patient outcomes and clinical efficiency. In 2013 we made a good progress on this objective and I am confident that our pipeline will drive continued commercial success in 2014.

Our close secondary objective has been on improving our operating platform to allow for margin expansion, even in small growth environments. I have a few brief comments on both of these areas.

Overall the businesses have been focusing on commercializing some key internally developed innovations, innovations in the chair side of consumable category with new composite products such as TPH Spectra is gaining market share in the large composite category. With two new innovations in this area SDR which is the Bulk Fill restorative and now TPH Spectra, we have a competitive portfolio with clear procedural advantages.

In other restorative categories we launched AquasilUltra Cordless in Q4. We are gaining momentum in this new category which simplifies the restorative procedure by eliminating use of a retraction cord. We also entered the large and growing Fluoride varnish category by launching both a white and clear varnish solution and went from absent in this space to a proud number share position in one year.

Outside of our internal development we did a complete a small transaction to support our consumables business in late 2013 with the acquisition of Triodent, a New Zealand-based manufacturer of a line of restorative dental consumables. Triodent is known for its innovative and patented sectional matrix system which has been well accepted by clinicians globally and is very complementary for procedures involving key restorative products such as our SDR.

Success in the dental specialty segment is also heavily dependent on innovation and I am pleased with our pipeline. Recent examples include the continued success of our endodontics portfolio providing comprehensive state-of-the-art solutions for root canal therapy. Over the past three years we have changed the game in the specialty with newly introduced reciprocating file systems, WaveOne and Reciproc which offered the potential of one file endodontics. These solutions combined with GuttaCore, a non-carrier based dermal filling material provides superior obturation and greatly enhances the ease and efficiency of endodontics.

In addition last year we introduced ProTaper NEXT the next generation of rotary endodontics providing superior flexibility, improved cleaning and shaping and a unique patented swaggering motion which ensures that the file maintains root canal integrity.

Clinicians can feel this difference with the file and we are having good commercial success and positive feedback from leading global opinion leaders. These are just a few quick examples of innovation in our pipeline. Overall, I feel good about our forward looking pipeline and our ability to bring innovations in the marketplace in each of our product portfolios.

In regards to our implant business we are now two years plus from the acquisition and with the last of 19 subsidiaries fully integrated in early 2013, the integration from a high level is complete. Our focus has now turned to business effectiveness, new product development, executing our market strategy and continuing to drive synergies. We have executed well on our synergies, despite market related headwinds.

We have made good progress with the CNC insourcing of Astra Tech implants, we are on schedule and completed 50% of our insourcing in 2013 and expect to complete 90% of our insourcing plan by the end of 2014. Overall I think we have made good progress in positioning this business for strong earnings leverage as the market environment recovers and begin to grow.

Lastly I would like to add that we have been focused on how to better leverage our cost structure so that we can expand operating margins even in lower growth environments. This has included leveraging manufacturing assets as well as maximizing the leverage of our related overhead structure. We were pleased to see operating margin expansion in 2013 despite the slow environment in Europe and the implementation of the medical device tax in U.S. Our early success in this effort is encouraging and I see room for meaningful improvement going forward.

With I would like to turn it over to Chris Clark. Chris?

Christopher T. Clark

Thank you, Jim good morning everyone. I would like to provide some detail on both our fourth quarter and also our full year results by reviewing key elements of our income statement and also providing some additional color on both the balance sheet and cash flow.

For the fourth quarter, sales excluding precious metals grew 1.5% compared to prior year, including 80 basis points of internal growth, 30 basis point benefit from recent acquisitions and favorable currency translation of 40 basis points.

Gross profit rate on an adjusted basis in the fourth quarter was 56.5% of sales excluding precious metals, which was an improvement of 20 basis points versus prior year despite the negative headwind of between 40 and 50 basis points from a medical device excise tax in the U.S. as we've mentioned precociously.

SG&A expenses on an adjusted basis were 39.3% of sales excluding precious metals in the quarter, identical to our rate in the fourth quarter 2012. Operating margins for the quarter improved by 10 basis points to 17.2% of sales excluding precious metals on an adjusted basis compared to 17.1% in the fourth quarter last year, reflecting the gross margin and SG&A impact I just described. Overall we are pleased to deliver some operating margin expansion in a low growth environment despite the headwind we faced from currency and to a lesser extent the medical device tax.

Currency represented a significant headwind to earnings in the quarter of slightly over $0.03 per year, due largely to the significant weakening of the currencies in Canada Russia, Australia, Latin America and the Asia Pacific region. As those currencies weaken our cost of products in local currency rises, creating gross profit headwinds as we import goods into these markets from the U.S. and from Europe.

Our reported tax rate for the fourth quarter was 14.3% while our operating tax rate was 20.8% in the quarter which represented a 130 basis point improvement compared to our average rate for the first three quarters of the year and a 350 basis point improvement over the operating rate in the fourth quarter of 2012 or about $0.03 per share impact. This improvement in rate basically offset the currency headwind we experienced in operating income that I previously mentioned.

Net income attributable to DENTSPLY International on an as-reported basis in the fourth quarter was $74.4 million or $0.51 per diluted share compared to $126.8 million or $0.88 per diluted share in the fourth quarter of 2012. These results include a number of items which we listed in the schedules in the release including an exceptionally large one-time tax benefit in 2012.

On an adjusted basis net earnings grew to $87.9 million from $81.4 million in the prior year quarter and adjusted diluted EPS grew 9% to $0.61 per diluted share. Of course this 9% EPS growth rate includes the offsetting impacts or currency impacts as I described earlier.

Transitioning now to full year 2013, sales excluding precious metals grew by 2.1% compared to prior year, including 1.9% internal growth and a 10 basis point tailwind from both acquisitions and currency translation. As Bret indicated our U.S. internal growth for the year was 3.8% which we believe to be stronger than underlying market growth.

European internal growth was positive 0.2% in a flat to down market while internal growth in the rest of the world regions was 2.7%. Internal growth within the developed countries in this region was flat for the year in aggregate. And on the other hand our global internal growth rate for the emerging markets was mid to upper single digits for the year.

For the year the U.S. comprised 34% of our global sales while Europe represented 45% and the rest of the world region, 21%. Gross profit on an adjusted basis for 2013 was 57.4% of sales, excluding precious metals which was a decline of 50 basis points versus last year's 57.9%. Again we had to meet the negative headwind of approximately 40 to 50 basis points from medical device excise tax in the U.S.

SG&A expenses on adjusted basis were 39.8% of sales excluding precious metals, that's an improvement of 70 basis points compared to last year's 40.5% and reflects the impact of our cost reduction and integration efforts. You will notice that restructuring and other costs totaled $13 million for the year and including just over $8 million for the fourth quarter primarily for investments we've made to realize these synergies and efficiencies.

Operating margin for the year improved by 10 basis points to 17.6% of sales excluding precious metals on an adjusted basis compared to 17.5% last year. And again in delivering this modest improvement we had to overcome both the currency issues and the medical device tax, so we are generally pleased with our operating leverage in the business that is generating under really slower than ideal market growth conditions.

Net income attributable to DENTSPLY International on an as average reported basis for 2013 was $313.2 million or $2.16 per diluted share compared to $314.2 million or $2.18 per diluted share in 2012. These results also include a number of items which we have listed in the schedules in the release including the exceptionally large one-time cash benefit in 2012 that I mentioned earlier.

On an adjusted basis, net earnings of grew to $341.2 million from $319.2 million in 2012, and adjusted earnings per share grew 6% to $2.35 per diluted share from $2.22 per diluted share in 2012. Our results for the year include a negative impact from currency of between $0.05 and $0.06 per share due to the factors I described earlier. This was offset by favorability in our operating tax rate in 2013. We see some upward pressure on our tax rate going into 2014 which I’ll discuss in a moment.

Moving on to cash flow, our operating cash flow for the year was a record $417.8 million, that’s up 13% from $369.7 million last year. And this, the improvement largely reflects latent cash and tax benefits associated with recent acquisitions. Our cash flow performance allowed us to take a more balanced approach to capital deployment as we moved through the year including reducing our net debt-to-capital ratio from 39% at the beginning of the year and 51% immediately following the Astra Tech acquisition in August 2011 to 35.2% as of December 2013.

In addition we announced the acquisitions of the Triodent and QAHR businesses in November. And finally we were also increasingly active in repurchasing shares to offset dilution from equity plans. And we repurchased just under a 1 million shares in the fourth quarter at an average cost of $47.65 per share. For the full year the company repurchased approximately 2.7 million shares.

Inventories now stand at a 114 days which is down five days compared to September and up eight days compared to December 2012. As we mentioned previously we have strategically increased inventory in few a businesses as part of the transition plans associated with the anticipating operating changes. We anticipate that inventory may continue to increase slightly through mid-year to support these efforts before returning to more normal levels as we move through 2014 and 2015.

Accounts receivable days were 56 days as the end of December, down eight days from prior quarter and up three days compared to December 2012. Capital expenditures for the year totaled $100 million for the quarter consistent with our most recent projections. Depreciation was $82 million for the year while amortization was $46 million.

Finally as Bret stated, we’re establishing our 2014 earnings per share guidance at $2.45 to $2.55 on a net adjusted basis. Our guidance reflects the impact of the incremental currency headwind of approximately $0.04 per share largely due to the weakening of the second tier currencies I mentioned earlier. In addition we currently anticipate an operating tax rate for 2014 that will be in the range of 22.5% to 23%, which represents an earnings headwind of up to $0.05 per share compared to our 2013 rate of 21.7%. There may be some opportunity to improve on this as we move through the year so we’ll have to see.

Our guidance reflects the anticipated impact of both of these items as well as our assessment of continued above market performance and a modest strengthening of market conditions. That completes our prepared remarks. We appreciate your support and we’ll be now glad to answer any questions you might ask.

Question-and-Answer-Session

Operator

(Operator Instruction). And we will take our first question from Jeff Johnson from Robert Baird.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated

Thanks guys. Can you hear me okay?

Bret W. Wise

Yeah, hear you fine.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated

Sorry I am in an airport so sorry for the background noise. But wanted to start first just on couple of your specialty businesses and end of [inaudible] plants, if you could at all give me any insight kind of where do you expect share to go this year, I think we feel like those markets could grow low to mid-single digit this year. But where do you think you share specifically in those two markets could go this year?

Bret W. Wise

I’m going to answer that in part of that. And then I’m going to ask Jim talk about maybe some technologies that we have in the market or coming. I think that 2013 was a pretty disruptive year for our implant business. We did complete the integration in the largest country for that business which was Germany, but also Japan. I think the business is now very focused on creating the kind of competitive advantage that it needs to invest. I’m hopeful that we can start to grow share there again as well.

On other things in the specialty business we've got orthodontics which is still in a recovery mode. We've recovered some of the lost share that we had following the disruption in Japan. But I think I've commented earlier in the year in several cases that, that's a very competitive market right now with us trying to edge our way back in and the competitors trying to defend their market share. I think that we will continue to take some market share back in that category. It's just a question of how fast we can take it back.

In endodontics that's a business is very much driven by innovation. We've brought out some kind of game changing innovation over the past few years that have allowed us to grow share in that marketplace and we've got some pretty interesting things in the pipeline. So that's a market I think we continue to have some competitive advantage in. Jim do you have anything to add on those?

James G. Mosch

Yeah, absolutely. Jeff I think from a standpoint of the implant business, as we've mentioned we are now eclipsing two years. Now I think what's probably happened more than anything is this business has really stabilized and moved beyond the integration. And we can just see the activity level and the focus and the competency at our field level really around the world. And I think that's really proving that I think our business strategy is sound and this organization is performing at a much better level.

At the same point in time we've done some things from the standpoint of how we improve that business model. We've done some consolidation of our ES Healthcare and our materialized dental business into Atlantis. Those products are now -- you are able to order those via Atlantis, order at least the ES products. We are manufacturing bars and bridges in Atlantis and we are integrating the guided surgery products with the Atlantis product.

So we are seeing some real opportunity to offer a lot of value to our customers and we believe that this along with some product innovations in the implant area will help us to move forward. As it relates to endo as Bret said we've launched a lot of new products over the last couple of years, products like WaveOne or Reciproc, ProTaper NEXT.

And I think what I would emphasize about these products versus traditional products is that what they really do is they simplify and expedite the endodontics procedure. They reduce the number of files used, they allow the clinicians to get a high quality result in less time. And those have been extremely well received in the marketplace. And even though we have had successes with those launches in the last year we continue to see a share gain as a result.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated

Great, that's helpful, thanks Jim. And Bret I guess one last question for you just on a high level, it's been a few years since we've seen any kind of double-digit EPS growth. How do you guys -- it sounds now in 2014 cash and currency will probably create a little more impact than I think any of us were expecting. But where do you think fundamentally if general markets can get back to maybe 3% to 5% growth, knowing where you are at in the different business lines and all that, what do you think fundamentally is your longer term EPS growth potential as we cycle thorough maybe some of these macro issues and what have you?

Bret W. Wise

Well I think the fundamentals about the general market and the competitive position that we have has not really changed, meaning if we can see these markets will return to kind of pre-recession levels with call it a 4% to 6% growth for the marketplaces then our business model is in really good shape to get the kind of operating leverage that we've historically gotten. So I think in and you throw on top of that some earnings gains from redeploying the cash that we generate I think those kind of earnings gains long-term are clearly possible and of course in those environments we would be striving to hit those.

In the current environment we have a U.S market that's growing low single-digits, we have a European markets that's probably, I mean realistically it's probably just flat. We are kind of expecting that both the U.S and European markets are going to accelerate by about a 100 basis points maybe a little bit more in Europe this year, although even with those accelerations gets us back to the longer-term trend line.

So we are pleased that even in a tough environment this year with currency headwinds, device tax, this, that and the other things we still grew operating margin a little bit. I think we've been working very hard to get our cost structure in place. That will allow us to have the kind of earnings leverage that maybe we saw historically if we get back to a market that can grow in that 4% range and we can grow a little bit faster in that through innovation and so forth.

Operator

And we will take our next question from Steve Beuchaw from Morgan Stanley.

Steve Beuchaw - Morgan Stanley

Thanks for taking the questions. First of all I wonder if Bret and maybe Jim if you could spend another minute on the impact of the weather that you called out, clearly a U.S. centric issue. How much of the impact of weather would you say that came along in the fourth quarter, how much are you embedding in your expectations for the first quarter and in which areas of the business might be more and less weather sensitive?

Bret W. Wise

Well, let me take a shot at that. This is always difficult because we don't really have great data on what's happens in the general obturatory when we have a blizzard or we have ice storm et cetera. But I will say that, the weather that we had just mainly first quarter issue not a fourth quarter issue but weather that we had on East Coast and to a lesser degree in the Midwest in January and early part of February was pretty severe. I mean, we had probably the economy shutdown for 90 plus million people at some point due to these recent storms, and that does have an impact on dentistry because the obturatory is closed. So dentistry doesn't get done during that period of time.

The data points that we have is, we looked at growth in the various regions throughout the world, excuse me not throughout the world throughout the country and compared them, the ones that were weather related to the ones that weren't weather related and there is a pretty divergence in growth here early in the year.

Now hopefully because dental ailments don't stop, correct they keep getting worst hopefully that will level out over the next few months and people that had their appointments canceled or canceled their appointments because of weather end up back in the dental obturatory later because those same ailments corrected.

So to us it looks like a temporary thing. It was pretty notable in the first let's say five weeks of the year and again we are hoping that will level out as we move through the year.

Steve Beuchaw - Morgan Stanley

Thanks, that very helpful. And one quickly on SG&A, Jim just falling up on your comments in the prepared remarks, the SG&A for 2013 was straightly remarkable, keeping it fairly flat in dollar terms. Can you give us any color on what you are expecting in terms of SG&A growth? Is that a re-acceleration in 2014 and may be along the same lines, speak to how much runway there is in terms of the cost control efforts that you have implemented thus far? Thanks so much.

Christopher T. Clark

Yeah, Steve it's Chris. I will take that. In short, we are pretty pleased with the SG&A leverage we were able to generate and as mentioned and as Jim mentioned and I think I mentioned as well in our comment that has been a clear focus strategy for us. Obviously, on the integration efforts but also frankly in terms of our base businesses as well and again we do believe that as a lower growth environments we need to focus a little bit more on manufacturing operating margin improvements.

We try to obviously focus the business and the businesses have been focused heavily on doing that. We are pleased with the performance they delivered on that in 2013. As we move to 2014, we would expect to get some additional leverage. So say with some of the structural moves we made later in the year. I mentioned the restructuring charges and that's not atypical for us. I mean as we move throughout the and typically move forward, as we identify opportunities to make the business more efficient we will take restructuring charges from time-to-time.

So I think we would expect to continue to able to get some improvement on the SG&A line moving forward. I am not going to speculate in the context of what the ratio may be but we typically do record SG&A rates to grow basically below what the sales growth rates are and we are pleased with the ability to do that in '13.

Steve Beuchaw - Morgan Stanley

Okay. Thanks everyone. I'll see you in Chicago.

Bret W. Wise

Thanks

Operator

And we will take our next question from Robert Jones from Goldman Sachs.

Robert P. Jones - Goldman Sachs

Thanks for the questions. I was hoping if you guys can share a little more on your assumptions relative to 2014 guidance around capital deployment specifically. You guys have done nice job of getting the debt ratios back to a more normal level. And pre-Astra Tech I know buyback were certainly a bigger part of the EPS growth story. Is there anything you can share with us on how you are thinking about capital deployment and repurchases specifically in 2014?

Christopher T. Clark

Sure, Robert. This is Chris. I'll take a stab at that as well. I think we have been commenting on recent calls about the fact that we're really trying to take a far more balanced approach to capital deployment. We think that we will be de-leveraged now to a position which really allows us to do that, and I think that's certainly our expectation as we move through 2014.

Specifically relative to share count we certainly don't anticipate shares to be the headwind they were year-on-year in 2013, if anything that going to be a little bit of help. On top of that, obviously, we did some acquisitions that can give us a little bit of a lift here next year and we expect some modest accretion from that particularly the largest one being internalization of kind of minority interest line that we are internalizing that into the base business if you will as we move through 2014.

So I think that you continue to see us through to balanced approach relative to some share buybacks again a little bit of a lift may be from that, but also focusing on acquisitions also deleveraging a little bit as well.

Robert P. Jones - Goldman Sachs

So I guess just because the last couple of years haven't really been a normal buyback year is there any just range you can give us if we think pre- Astra Tech is it fair to think of $150 millionish as a level that you guys are comfortable with executing against the debt ratios or like you said more stable?

Christopher T. Clark

I think Robert a fair amount of that depends on some of the acquisition opportunities that may present themselves throughout the year. So I really hesitate to give you a number on it but I guess what I would say is that again our capital deployment strategies are to ensure number one we don't go backwards relative to share count in terms of dilution.

And again I anticipate having a slight benefit if anything from that line moving forward in 2014 but I guess again we look to make -- deploy capital, make the business stronger and then also look return cash to shareholders if that's the -- if can find good ways to do that.

Robert P. Jones - Goldman Sachs

Got it. Then I guess just my follow-up and I know you guys are not giving specific guidance by geography, but if I heard you correctly Bret it sounded like you were saying you expected the European market to expand around 100 basis points. Just given the growth for the company in 2013 was affected by some very company specific events like the sales force integration for example, is there any sense you can give us on just general range of where you could see dent supply grow in Europe in 2014 above that 100 basis points that you called out for the boarder market?

Bret W. Wise

Well we don't give guidance on internal growth either in total or by region. Europe obviously is a large region for us, over 45% of our sales are in that region. So any improvement in that region we get pretty good leverage on in our P&L and of course we haven't really had improvement in that region for the last three years.

But I think the reason we called out what we expect the market can do with respect to both the European market and U.S. market next year was to send a signal that we're expecting those markets to accelerate a little bit and we would expect to get our fair share or perhaps a little more depending on the innovation pipeline when if in fact those markets do accelerate.

So again we don't give specific guidance on internal growth by region but we were trying to signal that we would expect some improvement there.

Robert P. Jones - Goldman Sachs

Got it, thanks for the question.

Operator

And we'll go next to Brandon Couillard from Jefferies.

S. Brandon Couillard - Jefferies & Co.

Good morning. Bret could you elaborate on what you saw on the fourth quarter between each of the sub segments, I am talking about like the implants, healthcare, lab, just like consumable, and then in the U.S. I believe last call you said you expected a draw down in the inventories, did that materialize and was that affect a net negative year-over-year versus the buy-ins last year which you saw in the fourth quarter?

Bret W. Wise

Okay. Let me take a step at the first question, I'll let Chris field the second question. Overall in Q4 we had internal growth of 0.8% but we had low single-digit growth in consumables in the specialties, we had kind of mid-single digit growth in the medical line and we had negative growth in the lab business.

We don't give a lot of color within those categories although I'll give you a little bit of color on implant and in the future I would like to stick to the dealing with the specialties in total. But with respect to implants we were slightly negative on implant in the quarter with Germany. And without Germany we were slightly positive on implants in the quarter and that was led by the U.S. and the rest of world markets whereby of course Germany and Europe, Europe was negative for us in the quarter.

So that's the -- that's kind of the general trends within each of those categories for the fourth quarter.

Christopher T. Clark

So to go through the delivery inventories Brandon again we commented on the fourth quarter call last year that there were number of factors kind of going both ways. We saw the net impact of all of that was probably inflating internal growth in the quarter by up to a full percentage point. And the largest factor that we mentioned at the time was really the fact dealers kept heavy inventory levels in the U.S. in Q4 after our total price increase in some cases even increased them further in advance of a January first price increase last year.

This year we ran up against that fourth quarter base issue and we also saw dealers as expected push their inventories down towards more towards normal level if you will after increasing them in advance of our October price increase this past year. So as expected we really saw pretty large divergence between retail sales and the wholesale sales in the quarter with the U.S. And again as we expected and you would be thinking of in general this growing channel inventories in aggregate are back down more towards normal levels if you will and that's probably got some give and takes across some of the individual businesses, but I think that's the aggregate comment holds.

S. Brandon Couillard - Jefferies & Co.

Thanks, and one more for Chris, could you give a sense of what your net interest expense expectation is for next year and then some view around operating cash flow and CapEx that will be helpful? Thank you.

Christopher T. Clark

Yes, sure. Net interest expenses for the year we will have a little bit of benefit in terms of net interest expenses from the deleveraging but unfortunately it's going to be slightly offset as a result of lower interest income as we reduce some of the deleverage positions. So the net of that is just going to be essentially flat.

In terms of cash flow for the year, obviously we had a pretty significant investment in working cap, in particular in inventory this year as we've mentioned. We would expect that to obviously not repeat as we move through particularly in the second half of next year and move forward. So I expect a little bit of a lift there. And again in terms of capital we entered last year guiding frankly in the $130 million range. We ended up at $100 million. That was really timing related on couple of key projects and I think for 2014 I would expect something back again guiding probably in $130 million range.

S. Brandon Couillard - Jefferies & Co.

Superb, thank you.

Christopher T. Clark

Okay.

Operator

And we will go next to Glen Santangelo from Credit Suisse.

Glen Santangelo - Credit Suisse

Yes. Thanks and good morning. Hey Bret I just want to follow up on some of the comments you previously made around Europe, if we were to strip the implant business out of your Europe sales for a second, is it fair to say that, that in aggregate the business was in positive territory on an organic basis this quarter?

Bret W. Wise

Yes. It was and we had 16 running quarters of positive growth in Europe. This was first when we went negative, but absence implants and in particularly absent the German implants, yes, we would have been positive low single-digits.

Glen Santangelo - Credit Suisse

And so embedded in that, I guess you are suggesting that you continue to take some market share because, was the market you think flat or better or you think the market is still in a negative territory and you are just taking share because I am just trying to reconcile that back to your comment that you expect European market to expand 1% next year.

Bret W. Wise

Yeah. I think the market was flat plus or minus may be half a point. The data that we have on the European market is not as good, as we get in the U.S. market but just looking at all the data points in total we would say that, European market was flat in the fourth quarter and we were up low single-digits. That's entirely driven by the innovation platform we have and we would expect that to continue.

Glen Santangelo - Credit Suisse

And then may be just one sort of follow-up question on the guidance, it kind of sounds like you don't have any capital deployment sort of baked into that guidance and you are suggesting that you are going to take a balanced approach. Could you may be give us some sense for what the acquisition pipeline looks like at this point in time?

Bret W. Wise

Yes. Let me ask -- let Chris take that.

Christopher T. Clark

Yes. I think from an acquisition standpoint there is lot of discussions happening. Again we were pleased to be able to complete two small deals in November. I commented as well that and again additional acquisition benefit that we will have in 2014 relates to the internalization of that minority interest line, which is certainly bringing -- that brings about $0.03 per share in terms of additional accretion.

So again, I think that there is no doubt that we are continuing to look at acquisitions beyond what we have already done as opportunities, obviously, those are binary. They happen when they happen and we are optimistic we can done some sure but at this point in time I think our guidance reflects what we have already done.

Glen Santangelo - Credit Suisse

But just to confirm, you are comfortable with the leverage you're at right now so there is no plans to further deleverage it. As we think about use of free cash flow it should either be to do acquisitions or share repurchase.

Christopher T. Clark

I think we have got some opportunity. Again I think, Glen the way to think about it would be a gradual, really a balanced approach. We may do some additional gradual deleveraging to provide additional dry powder for the future. But I think that's going to be in the context of a balanced approach relative to share repurchases and acquisition.

Glen Santangelo - Credit Suisse

Okay. Thank you.

Bret W. Wise

You bet.

Operator

And we will go next to John Kreger from William Blair.

John Kreger - William Blair & Company

Hi. Thanks very much. Just a couple of questions on what you are assuming in guidance for '14. I know you don't like to give specific revenue targets but would it be reasonable to assume that on a consolidated basis you could do perhaps 3% or better for the year given your comments about some market growth improvement?

Bret W. Wise

Yes. I don't want to give specific guidance on internal growth for the next year or for the current year 2014, but again in the guidance comments when we said that the market -- we are expecting markets to accelerate in the U.S. and Europe, we would expect to get our fair share of that.

And then secondly the wild card would be this rest of the world region where we've had these major devaluations. I am not sure what will happen in those countries but I think that adds some risk to the equation, certainly at this point. But to the extent we see the market acceleration happening we would expect to get our fair share or more of that.

John Kreger - William Blair & Company

Great, thanks, Bret. And perhaps a follow-up, what's your pricing are you assuming you can get in 2014?

Bret W. Wise

Yeah, John our price increases were generally taken back in October. We are pleased in terms of basically at this point what looks like in terms of what is stuck. And again I would guide that in the range of probably 1.5% pretty consistent with where we have been in the past.

John Kreger - William Blair & Company

Great, thanks. And then one last one, Bret if you look at the implant market more broadly what are you seeing in terms of the three different sort of broad price points and are you sort of comfortable with your offering across those three price points?

Bret W. Wise

Let me take a stab at that. I don't know if Jim will have anything to add or not. Obviously the three price points for implant is there is a premium segment out there which includes a vast array of technologies, everything from digital treatment implanting to drill guides to customized assortments, implants et cetera, it's pretty broad category. There is kind of a mid-tier sector and there is kind of low tier sector.

We don't -- we participate in the premium sector only at present. I think that particularly in Europe where the economy has been really, really horrible premium implants have had a lot of pressure and in that environment I think as in every area of dentistry lower cost products sometimes gain some share. I think over the long-term in this, in what's a pretty technical discipline within dentistry we are going to see people want to use the most advanced technologies and that's where our focus has been. Jim you want to comment on that.

James G. Mosch

Sure. Yeah, John, from a standpoint of the implant business globally, we continue to focus on the premium category. We believe that there continues to be a lot of opportunities for differentiation. We have plans for innovation in that area. Some of the things I mentioned earlier as it relates to digital technologies and I think the impact that they can have to offer a lot of value and more simplicity for the clinician we will continue to focus on.

As it relates to the value segment we continue to monitor and analyze that closely. There is no question we can see the visibility of that segment in the emerging markets. In the more developed and more premium markets we continue to watch that closely as well. And I think the challenge that we see is that while there is certainly a lot of dialogue in that segment the difference between the premium and the value implant of $50 to $75 how that would influence the cost of treatment at the patient level of $2,500 to $3,000 is just a little bit uncertain at this point in time. And we continue to monitor that to understand really what's going to be the driver in the market.

John Kreger - William Blair & Company

Very helpful, thanks.

Operator

(Operator Instructions). And we will take our next question from Steven Valiquette from UBS.

Steven Valiquette - UBS Investment Bank

Hi. Thanks, good morning. Just a quick question on operating margin and leverage, you talked about some opportunities on the manufacturing side for operating leverage in 2014. That seems to be incorporated in to the guidance. I guess the question is, is the operating margin expansion specifically tied to your expectations of accelerated market growth in key geographies in 2014 or do you think you can achieve the operating margin expansion from your various initiatives even if the market improvement does not materialize? Thanks.

Bret W. Wise

Yes, Steve, it's Bret. I mean bottom line is there is no doubt that a more robust market certainly helps us in terms of operating margin leverage to our P&L. So our guidance includes obviously an estimated operating margin based on what we are estimating market growth to be and basically our sales performance to-date. So there is no doubt that obviously helps a bit.

That said we are also cognizant as I mentioned before that in lower growth environments we need to focus on manufacturing and the operating margin via efforts of our own and as I commented I think previously in terms of what that entails. And we are very focused on that and committed to that. And we have taken a number of actions last year that will obviously help us as we move forward this year, and we have got additional focus on that as we move through 2014.

Steven Valiquette - UBS Investment Bank

Okay. So I guess it's tied into that. So like in the last quarter you just had about 10 bips of operating margin expansion that was lower than what we saw in the middle of 2013 and obviously the growth organically slowed down a little bit in the top line in the fourth quarter. It sounds there's additional things you can do though in ’14, so it sounds like that the run rate exiting ’13 is the proper assumption for what you are capable of, is that the way to think of it?

Bret W. Wise

Yes obviously I think there is no doubt that the fourth quarter additional sales growth would help but I mean there’s couple of other significant factors on our operating margin, one is, I mean currency is a very significant factor. I mean we talk about currency in terms of a headwind of about $0.03 in the quarter in terms of basically operating profit, on slightly positive translational impact on the top line, if you can kind of see how that can have enormous impact.

So again I think there's some aberrations there in the fourth quarter but again as we move forward we have a lot of efforts in place to continue to improve in this area and if we get any width in the market that helps us further.

Steven Valiquette - UBS Investment Bank

Okay, got it. Thanks.

Operator

And we’ll take our final question today from Jon Block from Stifel.

Jonathan Block – Stifel, Nicolaus & Co.

Great, thanks, good morning. I've got maybe one or two just sort of clarifications and then one or two follow-ups. So first sort of clarification question, Chris, the tax rate step up that you mentioned in 2014, is that permanent, should we think of that as permanent or something specific to 2014 and then the FX headwind for $0.03 that you called out on the quarter, where was that relative to where you were in late October? I think it might only have been a penny additional relative to where you were in late October, is that correct?

Christopher T. Clark

Yes, so let me handle that one first. Yes, the FX was penny, incremental penny worse than what we had guided on the -- or indicated or suggested on the third quarter call, in the fourth quarter and the bulk of that change again was in what I'll call the second tier currencies which in aggregate for us comprise about 25% of our sales and as you look at it through 2013 there had been almost little over 10% devaluation in that basket of currencies versus the major currencies U.S. dollar, euro and Swiss. So that’s a big impact for us obviously in the quarter and obviously causing the bulk of the headwind for ’14.

Relative to the operating tax rate really what’s driving that is mix, obviously the international tax systems is pretty complicated, overall forecasting estimate but I think the primary variable for us is the geographic mix of income and in short we had a mixed benefit or tailwind in 2013 if you look at and compare that rate to 2012 rate you see that it really was an improvement in ’13 versus ’12 but we don’t, at this point expect that to repeat or fully repeat in 2014. So again it’s really more driven based on our mixed estimate in terms of income.

Jonathan Block – Stifel, Nicolaus & Co.

Okay, great.

Bret W. Wise

I will add to that, just longer term whether we can then get the rate back down again in future periods I think is yet to be seen, there’s lot of tax planning that we do and you have seen that rate move around a little bit from year-to-year. I don't know that this is a permanent change as much as it is a mixed change for 2014.

Jonathan Block – Stifel, Nicolaus & Co.

Okay, perfect. That’s very helpful. And then just sort of clarification question, Bret you mentioned the rest of the world, obviously you are getting a headwind from the currency devaluating relative to USD and I guess the euro as well. Just for preparing purposes, should we think about it, I think you mentioned flat growth is that in the rest of the world or is that in the emerging component of rest of the world as we think about growth in ’14?

Bret W. Wise

Well I am going to start and I think Chris will finish it but when you look at our rest of the world category it includes basically three developed markets and then the rest are emerging markets. The three developed markets are Canada, Australia and Japan, all three of which took a major currency devaluation in 2013, late 2013. So even the developed countries in that category got hit hard by currency. And when you look at the developed team components of rest of world of course and Chris can give you more statistics on this essentially all those countries took a pretty major development, excuse me, devaluation in the fourth quarter so it’s both components.

Jonathan Block – Stifel, Nicolaus & Co.

Okay.

Christopher T. Clark

I think the comment we made Jon was that the developed countries in those rest of the world region sales were essentially flat for the year and emerging markets overall for us were up mid-single to high single digits for the year.

Jonathan Block – Stifel, Nicolaus & Co.

All right, and maybe last one, and I will take the rest offline but just specific to the German implant business can you guys take a step back and discuss how comfortable you are, maybe some of the weakness and I think the weakness may have been [maintenance] stretching up longer than originally anticipated. Is that specific to the sales force reorg instead of sort of the market fundamentals and where you hear of you guys getting more aggressive, so can you maybe tease that out for us in Germany? What is sort of sales force reorg voice that will be in the rear view mirror shortly versus underlying market fundamentals?

James G. Mosch

Yes, Jon this is Jim Mosch. I mean from the data that we see from our competitors and also industry data, there is an indication that the implant market in Germany is down overall. So that’s not been helpful in the year. With respect to our integration activities we are very comfortable that, that organization has stabilized. It probably took us a couple of quarters longer than we would have liked but these were two large organizations and I think when you merge two organizations and one is the larger than the other, one essentially absorbs the other. When they are the same you got to combine them and therein lies the complexity of our German integration.

But we have seen sequential improvement in Germany and we are seeing a nice uptick so far in Q1, albeit this is compared to a post integration quarter in 2013 but we are comfortable that, that organization has stabilized and that we will move forward favorably.

Jonathan Block – Stifel, Nicolaus & Co.

Great, thanks for your time guys.

James G. Mosch

Thanks, Jon.

Operator

And that does conclude today’s question-and-answer session. Mr. Leckow I will turn the conference back over to you for any additional comments or remarks.

Derek Leckow

Okay, thank you very much for your interest in DENTSPLY. That concludes the conference call. If you have any other questions please give me a ring. I am available for follow-up. Bye.

Operator

And this does conclude today’s conference and we thank you for your participation.

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