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DENTSPLY International Inc. (NASDAQ:XRAY)

Q1 2011 Earnings Call

April 28, 2011 8:30 am ET

Executives

Derek Leckow – VP, IR

Bret Wise – Chairman and CEO

Chris Clark – President and COO

Bill Jellison – SVP and CFO

Analysts

Robert Jones – Goldman Sachs

John Kreger – William Blair

Brandon Couillard – Jefferies

Jeff Johnson – Robert Baird

Elliot Feldman – Barclays Capital

Scott Green – Bank of America/Merrill Lynch

Operator

Good day and welcome to today’s DENTSPLY International first quarter 2011 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to Vice President of Investor Relations, Mr. Derek Leckow. Please go ahead, sir.

Derek Leckow

Thank you very much, Kelly. And good morning, everyone. Thank you for joining us for DENTSPLY’s first quarter 2011 earnings conference call. Also with us today are Bret Wise, Chairman and CEO; Chris Clark, our President and COO; and Bill Jellison, our Senior Vice President and CFO. I hope you all had a chance to review our press release, which we issued earlier this morning. A copy of the press release is available on our www.dentsply.com.

Before we get started, it is important to note that this call may include forward-looking statements involving risks and uncertainties. These should be considered in conjunction with the risk factors and uncertainties that are described in our SEC filings. 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. And a recording of this call in its entirety will be available on our website.

I would now like to turn the call over to DENTSPLY’s Chairman and CEO, Bret Wise. Bret?

Bret Wise

Thank you, Derek. And good morning, everyone. Thank you for joining us on our call. Before we get started, I’d like to officially welcome Derek to our team as Vice President of Investor Relations. Many of you know Derek who is many years following dental companies, including DENTSPLY on the sell side, and we are very pleased to have him join us. He has significant experience in our markets and I think will be a significant addition to our team.

Moving to the results, this morning we are very pleased to announce record results for our first quarter 2011. As noted in our release, we delivered improved sales growth rates and much improved earnings performance. In fact, this is the best growth that we’ve seen since before the recession began in 2008.

From a revenue perspective, we recorded total sales ex-precious metal of 6%, and that was driven by constant currency growth of 4.6%. The 4.6% was comprised of internal growth of 3.8% and 0.8% growth from acquisitions. In addition, we also benefited from currency this quarter. This is a welcome relief as the euro and other currencies gained strength against the dollar during the quarter, and that added 1.4% to our sales growth ex-PM.

Our 3.8% internal growth does reflect the negative impact from the events in Japan in the quarter. However, it was modest, less than 0.5 percentage point. Absent that single event, we believe we would have reported internal growth in the low 4% range.

Geographic internal growth was plus 1.1% in the US, plus 4.1% in Europe, and plus 8.4% for the rest of the world. The US growth was aided by double-digit growth in implants and solid growth in consumables, and was negatively impacted by the supply outage for orthodontic product source from Japan, as we quickly put our customers on allocation following the March 11th quake and tsunami.

On an adjusted basis, including adjusting for the impact of the supply issue in Japan, internal growth in the US would have been closer to 2%. Internal growth in Europe continued to be strong at 4.1%. And in fact, this may be understated is the key tradeshow for the new product launches in Europe was the International Dental Show, which was held the last week of the quarter in Cologne, Germany.

We had a very strong presence in the show, including numerous new product launches with most orders, the majority of the orders being shipped the first week of April. We also saw a very strong reception for our base products, our existing product lines during the show, and I’ve asked Chris to comment on this further in a moment.

In rest of world, as I mentioned, we grew 8.4% on an internal growth basis. We had very strong growth in Asia-Pacific, Latin America, Middle East, and Canada. And as expected, due to the circumstances, we are slightly negative in Japan. Overall, we believe the consumable dental market made considerable progress towards returning to what we would view as more normal growth rates as we enter 2011.

Although the market growth may not have returned completely to the pre-recession levels, they are clearly trending in that direction at present. This is obviously very good news for the industry, for the market, and for DENTSPLY, and we are hopeful that these trends will continue.

Our product line growth was led by the specialty group and chair-side consumables, which were both up mid-single digits on an internal growth basis. The strongest growth was in implants, which had positive double-digit constant currency growth and was just under double digits on an internal growth basis. But we also saw substantially improved growth rates in our chair-side consumables and our endodontics driven in part by new product introductions.

As we commented on prior calls, we presently have a very full new product pipeline, which is scheduled for launch this year. And we are just beginning to enjoy a very positive market reception from these new product opportunities. In lab, our sales trend was negative in the quarter. That was due in part to a substantial decline in the use of precious metal alloys in Europe, with gold prices reaching record highs during the quarter.

We also have several new products coming to market in prosthetics later this year, including a new cobalt chrome product that will be taken to market in connection with our partnership with Sirona. It will be milled on the Sirona installed base in lab. In addition to that product, we have several other material offerings that will also be launched throughout the year and early into 2012. And I think it is fair to say that we are quite enthusiastic about the new opportunities we have in the prosthetics market at present.

With regard to earnings, we also saw an acceleration of earnings growth, up 17.1% on a GAAP reported basis and up 11.4% on a non-GAAP basis. Again, the events in Japan in early March and then continuing to the rest of the quarter did have a negative impact on earnings, but it was only modest in this quarter. Bill, of course, will have additional comments on the results, but from an overall perspective, I think it is fair to say we are very pleased with the results at the start of the year in 2011 and particularly pleased with our team’s execution on bringing several new products to market, and all this despite the headwind that we faced in Japan.

With respect to the situation in Japan, our sales of products in the country comprised about 4% of our total sales ex-PM. As expected, we saw the market slow following the events of March 11th and expect there will be a considerable continuing impact of this disaster for some times in the local market. I think that’s particularly true in the northern part of the country, but also may be true in the heavily discretionary procedures at least until some state of normalcy returns.

Regarding our supply chain, as we noted in our release on March 15th, we do have one key supplier that’s located in the evacuation zone. With respect to this supplier, they are commencing limited production at alternative sites at present, but expect it will be sometime before they can relocate the full operations and recommence supply of the full range of products and quantities to fully meet with demand.

We move forward to begin sourcing alternative products from numerous other suppliers, which will commence as early as next month, as well as through own production on a limited basis, and we also have implemented plans to reduce the cost structure of this business in the interim. All these actions taken together will provide some mitigation of the impact on our results. However, the extent of the mitigation is not completely clear and is subject to numerous variables.

Accordingly, as noted in the release this morning, we estimate the downside risk of $0.12 to $0.17 per share due to the events in Japan. And accordingly, we are reestablishing our full year earnings guidance for 2011 at a range of $1.86 per share to $1.98 per diluted share. I think it is important to note that our results in Q1 exceeded our internal targets for the quarter.

So there is a possibility that the remainder of our business will continue to outperform, particularly as we bring new product offerings to market, which may help to mitigate these impacts further. Outside the results, we completed one small acquisition in the quarter. We acquired the remaining minority interests in another business, and we also signed a third transaction to acquire a minority interest in a third company during the quarter.

Reinvestment in the company and acquisitions remains our top priorities for cash deployment. In addition, we did repurchase approximately 2 million shares during the quarter. And in March, our Board of Directors authorized an additional 12 million shares to repurchase. We have very strong balance sheet, strong cash balances, and to the extent we are not able to put that money to work on acquisitions, you should expect to see us use this authorization over time.

That concludes my prepared remarks. I’d like to now turn the call over to Chris for further insights on our new product pipeline as well as early results from the tradeshow activity. Chris?

Chris Clark

Thank you, Bret. And good morning, everyone. As Bret mentioned, we are pleased with the momentum we are seeing across our businesses associated with our innovation efforts and also the exceptional level of interest in our products at the recent trade events. I’d like to take a few moments and provide some additional perspective in both areas.

I commented in our fourth quarter call in February that we were entering the year with a particularly strong new product pipeline. Consistent with those comments, we introduced over 20 new products in the first quarter alone, well above our typical run rate. These launches stand our broad range of portfolios, including chair-side consumables, specialties and prosthetics.

And in general, I would characterize market reaction is very positive, as we at this point are already in a back order situation on several of these products. Importantly, we still have a disproportionate number of new product launches scheduled for the remainder of the year, including several this quarter. Further reinforcing that our innovation efforts across the company are alive and well, and also that the impact of not reducing R&D investment during the economic downturn is paying dividends for us as the markets recover.

We are particularly pleased with customer reaction to our most impactful launches in the quarter. On the chair-side business, dentists have responded very favorably to the new ChemFil Rock advanced glass ionomer restorative with its superior mechanical properties and simplified placement process. You may recall that this is basically our first significant entrance into the estimated $100 million global glass ionomer category and represents minimal cannibalization risk for us.

Also in the chair-side area, we are very pleased with the reaction to our Cavitron Focused Spray slimLINE 1000 Insert, which continues to emphasize the value of improved sub-gingival access, and it significantly exceeded our initial expectations in terms of customer acceptance. In the endodontic area, we introduced the reciprocating file system in Europe during the first quarter and anticipate launching this product in the US later this quarter.

You may recall that this system reduces the potential for file separation or breakage and results in a much simpler clinical technique that reduces the time to shake the canal by up to 40%. Combined with the new GuttaCore obturation system launched late last year and the QMix 2in1 irrigating solution that we introduced in the first quarter, we believe these initiatives serve to define the next generation in endodontic therapy.

Finally, in the lab portfolio, we continue to expand our applications of our ceramic platforms by broadening our Ceramco PFZ or Porcelain fused to Zirconia line to include a wider range of shade options for the dental technicians. As Bret mentioned, we are also finalizing plans to introduce the unique milled cobalt chrome disk that will be available for customers who have Sirona Cerec in lab machine, providing the first significant expansion of milled CAD/CAM solutions into the growing non-precious metal segment.

We showed this product to the IDS, and we were extremely pleased with customer reaction to it. We estimate market introduction later in the second half of the year. We are also very pleased with the level of customer interest in our products of the various key tradeshows held during the first quarter. Our consumables businesses posted sales gains from the Chicago midwinter show in February and the Hinman meeting in Atlanta in March of almost 70% and 150% respectively compared to prior year shows.

At last month’s International Dental Show in Cologne, Germany, the largest dental show in the world, our European business has posted similarly strong results with respect to the new product introductions, consistent with surpassing our launch target by wide margins. We attribute these strong results to a more optimistic dentist customer base as well as the high level of interest in the clinical benefits provided by our new product launches. As I mentioned, we are similarly excited about the portfolio of launches yet to come this year, including several this quarter, and I look forward to providing you additional updates regarding our innovation efforts on subsequent calls.

I’d now like to turn the call over to Bill Jellison, who will cover the financial results for the quarter in greater detail. Bill?

Bill Jellison

Thanks, Chris. Good morning, everyone. Building on Bret’s comments earlier on the revenue side, the geographic breakdown was 35.8% in the US for us in the quarter, 42.4% in Europe, and 21.8% in the rest of world. Gross profit margins as a percentage of sales ex-precious metal content in the first quarter of 2011 were 56.9% compared to 56.7% for the first quarter of 2010. The rate was positively impacted in the quarter compared to the same period last year, as we realized the benefits of improved pricing and also benefited from improved product mix from new products and stronger specialty business growth.

FX continued to negatively impact gross profit margin by approximately a full percentage point and manufacturing costs were higher for some of the higher material cost, including metal prices and some polymers. SG&A expenses were $200.8 million or 38.1% of sales ex precious metals in the first quarter of 2011 versus 37.8% in the first – in the prior year’s first quarter.

These expenses were higher as a percent of sales primarily due to additional investments made to support our new product launches and also higher expenses supporting International Dental Show, which occurs every two years. Of the nearly $13 million increase in SG&A, over $3.5 million was from the impact of FX movements and acquisitions.

Operational margins for the quarter were 17.3% compared to 16.4% in the first quarter of last year. Operating margins based on sales, excluding precious metals, were 18.7% compared to 18.0% last year in the same period. And operating margins based on sales, excluding precious metals, for comparative purposes, excluding recent acquisition related activities and restructuring and other costs in both periods, would have been 18.8% in the first quarter of 2011 and 18.0% in the first quarter of 2010.

Net interest and other expense in the first quarter was $4.6 million compared to net interest and other expense of $5.9 million last year in the first quarter. This reduction in expense resulted primarily from both higher net interest income associated with the interest income of the DIO convertible bond held by the company and also lower foreign exchange transaction losses in the period. The corporate tax rate in the quarter of approximately 25.0% to 25.5% is relatively consistent with the first quarter of 2010, and we expect this to be a reasonable assumption for an operational tax rate for 2011.

Equity and net loss attributable to unconsolidated affiliated company reflects our investment in non-consolidated businesses. The loss shown is solely the result of the increased market value of the convertible bond we hold in deal. This bond gets mark-to-market in each quarter, and in a period when their stock price has increased as it has this period, it results in a loss on their financial statements. And we pick up our 16% interest of such loss.

Any gain or loss from that change in value is being treated as a non-GAAP item by us. The opposite impact of that valuation change is reflected in our financials, however it is run through OCI and not our income statement until we convert the bonds, at which time it will be run through our P&L but will also be flagged as a non-GAAP adjustment at that time.

Net income attributable to DENTSPLY International for the first quarter of 2011 was $69.1 million or $0.48 per diluted share compared to $0.41 per diluted share in the first quarter of 2010. Net income attributable to DENTSPLY International in the first quarter on an adjusted non-GAAP basis, excluding restructuring and other costs, recent acquisition-related activities, and income tax related adjustments, was $70. 6 million or $0.49 per diluted share in 2011 compared to $65.5 million or $0.44 per diluted share in the first quarter of 2010, an 11.4% improvement in EPS.

Cash flow from operating activities in the first quarter of 2011 was approximately $44 million compared to $37 million in the same period last year. The cash flow in the first quarter of 2011 was higher than last year due primarily to the increase in earnings and lower tax payments, offset somewhat by a greater increase in accounts receivables and sales were stronger in the quarter compared to last year.

Capital expenditures were $12 million in the first quarter, with depreciation and amortization at $17.9 million in the period. Inventory days were 110 at the end of the first quarter of 2011 compared to 102 at the end of the first quarter last year and 103 days at the end of 2010. Nearly half of the increase was a result of exchange rates and the balance was inventory builds for new product launches. Receivable days were 60 days at the end of the first quarter in 2011 compared to 59 days at the end of the first quarter in 2010 and 54 days at the end of 2010.

At the end of the first quarter of 2011, we had $575 million in cash and short-term investments. Total debt was $664 million, also at the end of the first quarter. During the first quarter, we have repurchased approximately 2 million shares or $74 million of stock. Based on the company’s recent increase in its authorization, which allows us to maintain up to 34 million shares of treasury stock, we now have approximately 12 million shares available for repurchase, although our top priority for using our balance sheet strength is primarily synergistic acquisitions.

Finally, as Bret noted, we are very pleased with our strong start to the year. Obviously, the events in Japan are having a negative impact on us this year. And given what we know at this time, we believe this is in the range of $0.12 to $0.17 per share. Including this impact, our 2011 guidance for earnings per diluted share on a non-GAAP basis is $1.86 to $1.98.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go ahead and take our first question from Robert Jones of Goldman Sachs.

Robert Jones – Goldman Sachs

Thanks for taking the questions. Bret, on the contingency plans that you discussed, I was hoping maybe you could share a little bit more detail about the variables, I guess specifically what really could impact the timeline here.

Bret Wise

Sure, Bob. Let me give you a few more insights on that. There is a number of variables here at work. One is with respect to our original supplier, our current main supplier, we sort from them approximately 4,800 SKUs. Their production site is or was in the evacuation zone. They have now abandoned that site and they are moving to alternative sites for production. But this is going to entail ordering new equipment, bringing it and installing it and validating it and then trying to ramp it up to full production volume. So the success or the speed of doing that is a little bit uncertain at this time although the equipment is on order.

The second variable is we are going to begin sourcing next month new products from numerous sources, and we will be constructing a portfolio of offerings to our customers, which we will begin to show at the AAO meeting two weeks from now in Chicago. Those products will then go out into the hands of our sales force and will begin to ramp up sales with those to try to mitigate the ramp-down of the existing inventory we have from the original supplier. And then thirdly, the main – the other main variable is, once the existing supplier comes back up, what’s the ramp-up time and recapturing – we have very little customers, but we’re going to have to go back out and recapture share from some of our competitors during the recovery period.

Robert Jones – Goldman Sachs

That actually was leading into my next question. I was just wondering maybe if you could help us think about market share loss. It sounds like there could be a window here where obviously between sourcing and the new site coming back on line could be a window there where you don’t have product for customers. How should we think about market share losses and how permanent they could be?

Bret Wise

Well, I think it’s important to note that we are not withdrawing from the orthodontic market. In fact, as I mentioned, we’re going to have new products to show in two weeks and begin taking shipments for those products next month. So market share loss is kind of a funny thing to try to define. Some of the products we get from our supplier are quite unique, and they are very technique sensitive. So we’re not going to have exact replications of some of those SKUs. So this will be a process whereby we’re rolling out new products to our customers, trying to teach them the technique on the new customers, and some of them might convert back to the old products after this crisis has abated and some of them may not. So I think that’s something that’s very hard to predict and with any certainty at least at this time.

Robert Jones – Goldman Sachs

It’s really helpful. And just one last one on the updated guidance, obviously some strong growth here across the board. I was wondering if maybe you could just help us how we should be thinking about the underlying market growth assumptions behind the new guidance and how that’s progressed year-to-date. Thanks so much.

Bret Wise

Sure. I think pre-recession, let’s call it 2004 to middle of 2008, the global dental consumable market was probably growing in the 4% to 5% range organically. I don’t think it’s quite there yet, but I think it’s probably starting to approach the low end of that range. And as far as we can tell, we don’t see anything changing that at this point. So, to a degree, we expect our other – let's call it the other 85% of our business is not affected by the crisis in Japan to outperform probably what we would have thought would happen in the beginning of the year, and we’re hopefully that will mitigate this situation further, particularly as those businesses move towards or even into the pre-recession range of growth.

Robert Jones – Goldman Sachs

Thanks for all the questions.

Bret Wise

Thanks.

Operator

We will take our next question from John Kreger with William Blair.

John Kreger – William Blair

Hi, thanks very much. A follow-up to Bob’s question about the situation in Japan. Are you out of inventory from your key supplier at this point or do you still have some?

Bret Wise

No, we – frankly the reason that the crisis had impact on us in the US in the first quarter was immediately after the crisis we put our customers on allocation. So it was a little bit self-inflicted. Right? We are holding inventory today that is – it's not at normal levels, but it’s a little bit diminished from normal levels. But it’s going to carry us well into the second quarter. We probably will have some SKUs. It will start going backward during the second quarter and then more in the third quarter. But we start substantial inventories at least at this point in time.

John Kreger – William Blair

Great. And then a follow-up to that, realizing this is probably a pretty fluid situation, as you model out the timing of the supply disruption, from your perspective, is the disruption likely to grow as you move towards 2012 or will it be moving back to a more normal situation by then?

Bret Wise

That’s a very good point. As I mentioned, we had a modest impact or a minimal impact really in the first quarter, and that was somewhat self-inflicted when we put our customers on allocation. That impact will grow in the second quarter but will probably reach its peak in the back half of this year. And then we would expect the mitigation efforts to start to have some impact towards the very end of this year and moving into 2012. So the dynamics we see are that this is going to affect just a little more in the second quarter, much more in the third quarter, probably much more in – not more in the fourth quarter, about the same as the third quarter, and then we’ll start to recover from there.

John Kreger – William Blair

Great. Thanks. And then just a final question, as you look at how commodity prices have been increasing, as you look out over the next couple of quarters, do you think the negative impact will grow for you? Is that reflected in your guidance?

Bret Wise

Let me take a stab and just going to ask Chris to elaborate on it if there’s more to say, but – our expectations about inflation are in fact reflected in our guidance. And today, we see some modest increases in things like transportation, resins, energy cost, etc. But to the extent we can forecast inflation, we have taken that into account in our forecasts. Chris, do you have anything to add?

Chris Clark

No, I think it’s very accurate [ph]. It’s really in utilities, transportation and there’s some metal prices as well. But again, we factored that into – we took a little bit more aggressive price increase kind of into the year and we’ll certainly factor that into our price increases thoughts as we move throughout the year.

John Kreger – William Blair

Great. Thanks very much.

Bret Wise

Yes. Thank you.

Operator

And we will go to our next question from Brandon Couillard with Jefferies.

Brandon Couillard – Jefferies

Bret, what’s your sense of the general demand environment? Do you still feel like there is a pent-up demand scenario in the market? Are we beginning to see some trade up to, say, discretionary-type procedures or product franchises?

Bret Wise

Good morning, Brandon. That’s a good question as well. I think one of the things we saw with respect to the new products that we are bringing out in the quarter was there was an increased enthusiasm from dental professionals to buy the more premium products. I don’t think it’s a avalanche yet in that direction, but there is certainly a trend in that direction and that was evident in really the very strong increases we saw in our tradeshow performance in all three tradeshows, which Chris mentioned. So I think that trend may be occurring. Certainly the implant market has picked up from where it was. We saw that strongly in our results, growing almost double digits on internal growth basis. And we saw that in many of our competitors’ results as well that have been out over the last week or so. So I do think there is a shift – it might be slight at the moment, but there is a shift back towards the more premium products, high performance products at this point.

Brandon Couillard – Jefferies

Thanks. And then, Bill, is there any buyback assumed in the new EPS outlook? And then, could you give us the FX impact to EPS, both in the quarter and in your formal full year outlook?

Bill Jellison

Sure. From an EPS perspective, I mean, the guidance that we give, you know the additional authorization that we have recently put in place, which is about 12 million shares. I think that it’s fair to assume that we have commitment to ultimately use the strength of our balance sheet further as we are moving forward here. How much or how little of that affects on the share repurchases, we really don’t comment on that until the period that we’re actually doing it. But I think that it’s fair to say that there is at least some expectation that there will be some share buyback. And I think that from an FX perspective, within the quarter itself, the bottom line impact was actually virtually neutral. It was just less than 0.5%.

I think moving forward, the different – a different impact. I think based on where rates have currently gone just recently, I mean, the euro is like at $1.47, I think the Swiss is out there around at $1.14, $1.15. Those are very strong currencies relative to the dollar at this point. I think if those rates continue, that we could see a slight benefit for us as we move through the year. I think our rates that we’ve got at least at this point are probably more, in kind of the $1.40-ish kind of range for the euro and maybe right around kind of the 1.00 – you know, just south of maybe the $1.10 level on the Swiss. So hopefully, that gives you some indication on the direction.

Brandon Couillard – Jefferies

Thanks. And then lastly, would you characterize the quantification of Japan as a worst case type of scenario? How conservative do you think I guess your quantification of the impact is? And any chance you could give us the revenue impact assumed in the $0.12 to $0.17?

Bret Wise

This is Bret, Brandon. I would say that the $0.17 is not an absolute worst case scenario. We’ve taken into account what we think reasonable scenarios would be, both on the low end and the high end and factored in kind of a risk-adjusted model. So, no, I don’t – it could have absolutely – could have be worse than the $0.17. I guess it could possibly, but we don’t think it’s likely. And that’s why we gave you that range. And the one big variable here, of course, is new products, the new products we’re going to bring in and take to market, which makes the sales number particularly variable, meaning we can control our costs much better than we can control sales. So, I’m not prepared at this time to give you an impact of what the sales would be, but the total – our total business impacted by this is about 13% to 14% of our total business. So that kind of at least tells you the risk of range on the sales line.

Brandon Couillard – Jefferies

Great. Thank you.

Operator

(Operator instructions) And we’ll take our next question from Jeff Johnson with Robert Baird.

Jeff Johnson – Robert Baird

Thank you. Good morning, guys. Can you hear me okay?

Bret Wise

Hey, Jeff. Yes, Jeff.

Jeff Johnson – Robert Baird

Good. So, Bret, just a question again on Japan, started to harp on that, but – you mentioned in the press release making some cuts on the cost side as well. There is a rumor out there that you had a pre-sizable cut to your orthodontic sales force. Can you confirm that or talk about maybe any cuts you made there?

Bret Wise

I’m going to ask Chris to address that.

Chris Clark

Yes. I would say, Jeff, we did – we certainly did implement some cost-cutting initiatives, if you will, or cost-balancing initiatives given the situation on the US business. That said, it was – the impact on the sales force was minimal. Really most of the cuts were frankly related to the direct labor. It worked in the plant because obviously we don’t have work for them to do right now given the incoming inventory situation.

Jeff Johnson – Robert Baird

Okay. Fair enough. And then, as I think about the recovery on this side of the business, Bret, you highlighted Q3 probably kind of hits a peak and maybe stays elevated into Q4. Do you see it as kind of a slow steady recovery going into 2012 or is there something where you could get a snap-back recovery as inventory immediately comes online or manufacturing, I’m sorry, instantly comes online? How does it play out on the recovery side of things six, 12 months from now?

Bret Wise

That’s a good question, Jeff. I don’t think it will be like a light switch. I believe, as our supplier comes back on stream starting up a plant of this technically oriented, there are usually some bugs and so forth you have to work out. So I think them getting back to full production will be a process rather than an event. Likewise, when we put the products back into our sales force’s bag, it’s going to be a process within rather than a light switch too. So I think it will be a building process that’s coming off a low that we’ll likely see in the third quarter and perhaps early in the fourth quarter.

Jeff Johnson – Robert Baird

All right. And on that business, obviously you guys have been distributing that product for quite a while. Any thoughts on whether or not something like this could lead to a change where you could actually take control there? Has that been pursued at all? Is the family that owns that business not interested at all at this point despite the circumstances?

Bret Wise

Jeff, you’re not going to be very satisfied with this, but I don’t want to comment on discussions with the family. They are very private family and deserve not to have this kind of thing discussed publicly, and the fact that we don’t comment on acquisitions that are in process until we’re ready to announce them. But this is a very fluid and dynamic situation where we’re considering all alternatives at this stage and hoping to rebuild this business as quick as we can through a number of avenues.

Jeff Johnson – Robert Baird

All right. That’s actually more than I thought I’d get out of you on that. So, thanks. And last question I guess, Bill, when we had dinner with you around the Chicago meeting, it sounded like you were a little more aggressive on the M&A front or pipeline was pretty full at that point. Does the Japan impact – or does the Japan situation impact the M&A thoughts this year? How do you describe M&A pipeline at this point?

Bill Jellison

I think the primary message there, Jeff, was that we realize the strength of our balance sheet right now. We realize the amount of cash that we have on our balance sheet. I think it’s always fair to say that we’re active on looking at a number of different acquisitions. I’d say, with the strength of the balance sheet that we have today, which is stronger than really it’s ever been, I think you should assume that we are very active on that front on a number of different areas. And the Japanese situation does not have an impact on that at all.

Jeff Johnson – Robert Baird

Great. Thanks, guys.

Bret Wise

Thanks, Jeff.

Operator

And we’ll take our next question from Elliot Feldman with Barclays Capital.

Elliot Feldman – Barclays Capital

Hey, guys, good morning. Thanks for all the detail thus far. This is Elliot filling in for Larry Marsh. Moving away from Japan just for a second, I know you guys mentioned double-digit growth in implants. I’m wondering if that was sort of consistent with market growth. I believe you guys expanded your North American implant sales force here again last year. So I was wondering if you can give us a sense of pricing dynamics you’re also seeing and which geographies are performing better than others, particularly with the implant space.

Bret Wise

Sure. I’ll take a stab at that and if Chris has something to add, he can add it. I think the market, the premium implant market, we’re trying to gather some information. So there are two announcements this morning from other premium players. But it seems like everybody is basically now reported. And I would say that the market is growing kind of low to mid-single digits. My best guess would be like 4% to 5% for the premium segment. And we’re growing 2X that or 2.5X that or something like that. So I think we’re certainly taking share. We have a very strong technology platform in the implant business, very good prosthetics. We expanded the sales force the best now at least a year past this date. And we continue to get very good customer acceptance of the system we have, both here in the United States where we’re kind of newer to the market and in Europe where we’re a more established player. Did I miss anything there?

Chris Clark

No. I guess I would characterize that our growth is higher in the US. That’s up double digits. We continue to think while that market has come back probably maybe a little bit better than some of the other markets, we continue to outpace market growth with the investments in the sales reps we did. That’s – we're continuing to invest there. We had a key symposium coming up in the end of June with some key opinion leaders as well in the US. So we’re excited about that opportunity. I would say rest of world growth is also very strong on a number of areas as well as and particularly in emerging markets. So I think that there’s a lot of momentum across the implant business globally. We’re pretty excited about it, and we think the systems is pretty hot commodity right now.

Elliot Feldman – Barclays Capital

Okay. That’s very helpful. Thanks.

Operator

(Operator instructions) And we’ll take our next question from Scott Green with Bank of America/Merrill Lynch.

Scott Green – Bank of America/Merrill Lynch

Hi, thanks for the questions. So I guess my one or two on Japan just to make sure that I understand your tone. Do you expect the rebuilding process in Japan into next year, is that going to be more getting the supply up or you’re optimistic based on your efforts that sourcing should be okay, it’s going to be more recapturing any lost sales in the market next year?

Bret Wise

I actually think it’s a combination of those two things. The process of moving to a new facility, buying new equipment and strong validating that can get back to production volumes, that’s going to be a – it's not a short-term fix. It’s a long-term fix. And our business partner, our supplier is in the process of initiating that and doing that now where I could set before the equipments on order. I think it’s fair to say that some of the product portfolio we’re going to have in the interim is not identical to the product portfolio we had before. So there’s going to be some customer shifting I would guess. And when we get back into full production, we’ll have to work very hard to shift them back. So I think it’s a combination of those two points that you raised.

Scott Green – Bank of America/Merrill Lynch

Okay. I guess for a President, I recall you had some of the supply disruption in 2008 in an anesthetic line. Is there anything you could look at there to gauge what kind of sales you ultimately recovered or is that not a good comparison?

Bret Wise

I don’t think that’s a good comparison necessarily, Scott, because that product is not a sophisticated product, it’s a commodity. And there was product available, identical product available in the marketplace to sap up the supply disruption that we faced. In this case, the products are very unique, very technique sensitive, and they are patented. And thus there is not going to be identical products in the marketplace for some of these SKUs, not for the whole portfolio, but for some of these SKUs until we get the existing supplier back up and running.

Scott Green – Bank of America/Merrill Lynch

Okay. Okay. So maybe that makes you a little more confident you can recapture some of these sales going forward if dentists that are using your product are obviously comfortable with it and it’s kind of a unique one? Is that fair?

Bret Wise

Yes, that’s a good observation. The products that we’re going to have in the market in the interim will be competing head-to-head with other competitors’ products. But the products that will out of stock for a while are the more unique parts of line and thus have some substantial sales and marketing benefits, technical benefits to the practitioner. And thus if they liked them before, they might be more willing to migrate right back to them. It’s hard to tell.

Scott Green – Bank of America/Merrill Lynch

Okay. That’s helpful. And another topic. So what’s your expectation at this point for your internal growth ex the Japan issues? I guess going into the year you thought it might be a little high or maybe you’re on 3%. What is the updated view now?

Bret Wise

Well, internal growth in the first quarter was 3.8, and it was depressed by probably a little less than 0.5 point. So we would have been into the low 4s for the first quarter. The market looks strong to us. We don’t have official internal growth guidance on this in the marketplace. But from the – hopefully from the language that you heard this morning and our results from these tradeshows, you get the sense that we’re pretty optimistic at this point that the other 85% of our business can perform pretty well in 2011.

Scott Green – Bank of America/Merrill Lynch

Okay. All right. And then lastly, it would helpful – can you just tell us in your breakout segments, US versus Europe versus rest of world, which of those regions you think will be more impacted than others from the supply disruption? How should we think about growth in each of those for the remainder of the year? Just kind of qualitatively what do you think would be impacted more than the others?

Bret Wise

Qualitatively, I think it will be the US would be the highest, Europe would be the next highest, and the emerging – the rest of world and emerging markets would be the lowest impacted by the supply disruption.

Scott Green – Bank of America/Merrill Lynch

Okay. Okay. Thank you.

Bret Wise

Thank you.

Operator

And that does conclude the question-and-answer session today. At this time, Mr. Leckow, I’ll turn the conference back over to you for any additional or closing remarks.

Derek Leckow

Thanks, Kelly. Well, thank you, everyone. That concludes our conference call today. We thank you for your interest in DENTSPLY and look forward to seeing you at upcoming investor conferences. If you have any follow-up questions, please contact Investor Relations. Good bye.

Operator

And that does conclude today’s conference. We thank you for your participation.

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