DENTSPLY International's CEO Discusses Q2 2011 Results - Earnings Call Transcript

|
 |  Includes: XRAY
by: SA Transcripts

DENTSPLY International Inc. (NASDAQ:XRAY)

Q2 2011 Earnings Call

July 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

Jeff Johnson – Robert Baird

Jonathan Block – SunTrust Robinson

Verdell Walker – Goldman Sachs

Ravi Fadah [ph] – William Blair

Ravi Fadah – William Blair

Scott Green – Bank of America/Merrill Lynch

Larry Marsh – Barclays Capital

Brandon Couillard – Jefferies

Operator

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

Derek Leckow

Thanks very much Caitlyn, and good morning, everyone. Thanks for joining us for DENTSPLY’s second quarter 2011 earnings conference call. I am here with 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 website at www.dentsply.com.

Before we get started, it is important to note 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. This morning we’re very pleased to announce record results for our second quarter of 2011. As noted in our release this morning, we experienced higher total sales growth rates and improved earnings performance in the quarter even in a phase of the headwinds that we’re facing from our supply disruption in orthodontics.

From a revenue perspective, we recorded total sales growth ex-precious metals of 8.7% which is the highest growth rate that we’ve had since the Q4 of 2009. Our constant currency growth was approximately 1% that includes approximately 0.1% from internal growth and the remainder from acquisitions. These figures are inclusive of our Japanese and orthodontics businesses. If we look at our internal growth excluding sales in the Japanese markets and orthodontics, the internal growth rate was 3.4% and constant currency growth was over 4%.

This reinforces our belief that the global dental market continue to slowly improve and while still not back to the long-term potential of the market, it’s certainly moving in the right direction. Currency provided a welcome relief this quarter as you know, offsetting the headwinds from Japan and orthodontics as both the euro and the Swiss franc gained strength over the dollar versus the prior year quarter to add 7.8% from currency overall. Geographic internal growth was negative 0.9% in the U.S., negative 0.8% in Europe and plus 2.3% in the rest of the world. And of course these growth rates include or reflect the decline in the orthodontics business which was down more than 20% in our key markets.

That was offset by positive internal growth across the rest of our business from the aggregate in particular endodontics and restoratives which were quite strong and our non-dental business which also continues to recover. Excluding orthodontics and Japan, our internal sales growth rate was approximately 2% in both U.S. and Europe and was about 9% outside the United States. Just a quick note on Europe, the growth rate ex-ortho and ex-Japan here slowed from about 4% in the first quarter to about 2% this quarter. Looking at the calendar, I think there is a couple of reasons while there may have been some acceleration into the first quarter at the expense of Q2 here.

The first is the timing of the Eastern Holidays which impacted Q1 more last year and Q2 and its entirety this year. Also the IDS which is the largest dental show in the world was held in the last week of March in Germany. We had a very strong performance at that show and now we believe we may have borrowed a little bit of sales from Q2 and put that into Q1 as result of that show performance. Accordingly at this point, we think it’s more meaningful to look at the first half growth rate of around 3% figure versus the second quarter.

In the rest of world, we had very strong growth in Asia-Pacific, Latin America, Middle East and Canada and as expected during the circumstances we were negative in Japan. Overall, we believe the consumable dental markets are stable and slowly progressing towards more normal growth rates. We continue to be very pleased with our performance here including the introduction of numerous new products and the launch results we have from those so far this year.

With regard to earnings, we’re very pleased with the record results we had for Q2. Earnings per share on a GAAP basis grew 6.1% to $0.52 from $0.49 a year ago and grew 10% from a non-GAAP basis to $0.55 from $.50 a year ago. There are several moving parts in these numbers and of course Bill Jellison will give you more of the details. Just a few highlights here though. First is that we had a $0.03 per share reduction in earnings versus the prior year quarter due to our businesses that were impacted by the circumstances in Japan, mainly our Japanese subsidiaries and also our global orthodontics business.

Chris will give you more insights into the status of our contingency plans however I’d like to note as we did in our first quarter call. And this negative impact will grow in the third quarter perhaps by double the impact in Q2 or more before starting to recover late in the year and early next year. So as you look at the next quarter, we expect that impact to increase. Also in the quarter, we had a stronger improvement in our tax rate, Bill will speak to this further but this is an ongoing improvement that should benefit us for several years.

I think the point here is that the negative impacts from the events in Japan were essentially offset by the positive impacts from the tax rate at least in this quarter. I think it’s fair to say that we’re very pleased with results particularly our team’s execution on bringing several new products in the market and also our progress implementing the recovery plans for orthodontics. Outside the financial results, as you know we recently announced the agreement to acquire Astra Tech AB from AstraZeneca. At this time we filed all the necessary regulatory filings and we received clearance thus far from Germany. So we’re still waiting clearance in the U.S. and in two other markets and we continue to believe this transaction will close before year-end.

As noted in our earlier release, we’re excited about this opportunity as it’s expected to increase our sales base globally by about 25%. It will double our implant business globally. It will increase our presence in digital industry and we will also be gaining access to another category of medical devices represented by primarily by urology. We believe this transaction will allow us to bring improved alternatives to our customers and also deliver improved opportunities for our stakeholders.

In addition to Astra Tech, I would note that we’ve completed three other transactions this year, two in Europe and one in the United States. Generally speaking, these are smaller companies, however we are excited about a technology company that we acquired here in the United States called AMD Lasers. This was acquired late in the second quarter and its one of the leading laser companies in the United States for using dental surgery. And it gives us access to a category that we had not previously participated in.

One quick comment on cash flow is in cash deployment. We did continue to deliver strong cash flow generation in the quarter and I think we’ve demonstrated that throughout market cycles. This year, we’ve grown our operating cash flow at close to 10%. Currently our balance sheet is essentially debt free on a net-debt basis. With the Astra Tech transaction, of course we’ll continue our reinvestment in company through R&D, sales force expansion, etcetera. However debt reduction becomes a higher priority in the near term as we expect to rapidly de-lever the balance sheet following this transaction.

This seems like an opportune time to increase our debt with borrowing cost that are currently quite low and to more efficiently use our cash outside the United States. On earnings guidance for the year, you saw in the release that we’re increasing our adjusted earnings per share guidance for the full-year from a $1.86 to $1.98 which we had established in April to new full-year guidance of $1.92 to $2.00. This guidance reflects our views on the continued strong operating performance including the improvement of tax rate. Current foreign currency exchange rates, our current thinking on the orthodontics supply situation and it excludes any impacts from the Astra Tech acquisition.

So that concludes my prepared marks. I’d now like to turn the call over to Chris, who will give us some further insights on operational changes related to orthodontics business in Japan and also comment on our new product pipeline. Chris?

Chris Clark

Thank you, Bret and good morning everyone. I’m going to take the next few moments and revise in deeper insights into our progress on the orthodontic front as well as an update on our progress of our new products. As you will recall, we commented on our first quarter call in April, about the impact of Japanese natural disaster on our global orthodontics business.

For the second quarter the impact is pretty much as we expected, as we were able to service customers well into the quarter through our pre-existing stock positions. And then we saw the negative impact worsen noticeably later in the quarter as our inventories were completed. On a positive note we’ve moved forward with our alternative sourcing initiatives and began receiving products from other suppliers in June [ph], marketed under the Resolve brand name, these products addressed the non self-ligating portion of our portfolio.

We assumed the very early days of introducing these products in establishing the Resolve brand. However we’re pleased with the initial customer assessments regarding this product offering in the past. On an even more positive note, we’ve also just received some initial self-ligating product shipments from our Japanese manufacturer that were produced at their new manufacturing site outside of the impacted region in Japan. You will recall that we are not able to source our self-ligating line from alternative suppliers as these products are highly specialized and exactly the product is not available from other sources.

Although these initial volumes that we received in this point are limited, and it does not noticeably change our near-term visibility of re-supply. We are encouraged by the development and see as a very positive sign that adds confidence to our previous estimate of being able to resume full supply early next year. In terms of the impact on our P&L as I mentioned earlier, the second quarter impact was pretty much as we had anticipated, looking forward to the third and fourth quarters, we do see the negative impact increasing further is expected likely to level double the Q2 effect as we are no longer – but we no longer had the pre-existing stock levels to support our customers.

While the alternatively sourced products and that smaller initial shipment from our Japan suppliers are helpful, we continue to believe that the impact of the supply situation will not go into Q3 and likely have a similar effect in Q4 depending on how quickly we’re going to return to market. We do anticipate the sales trends will improve once our Japanese supplier is able to develop additional capacity, particularly with respect for our self-ligation product line.

Before moving off ortho I would like to emphasize a point that we had made on the first quarter call. We are committed in the orthodontics arena for the long-term and we are viewing the current supply situation caused by the events in Japan through that lens. While we’ve implemented some restructuring initiatives to address our cost structure on the business, we’ve taken special care to ensuring that we’ve got the right organization in place to lead us back to above – strong above market growth as our supply situation improves.

And that while we’ve taken some actions to impress our fixed cost structure, we have retained a disproportionate amount of our infrastructure as we view that this is necessary to return the business to market position overtime. Moving beyond ortho, I commented on our last couple of quarterly calls about our excitement with what we view as a particularly large particularly strong new product pipeline. Consistent with those comments, we’re pleased to introduce several important new brands in the second quarter in addition to the Resolve line of orthodontic practice and accessories that I commented on earlier.

I’ll comment on just two of these this morning. First in the endodontics area, we continued to expand our introduction of the reciprocating file and motor system with the expansion to the U.S. market late in the second quarter. We’re extremely pleased with customer reaction to this mission globally and despite significantly expanding our manufacturing capacity, we remained challenged in the short-term to support the full-level of customer demand.

These systems are marketed under the Wave One and Reciproc brand names and help to reduce the potential for file separation or breakage while also delivering a much simpler clinical technique that reduces the time to shape the canal by up to 40%. Also in the second quarter, our European prosthetics business introduced the new Cercon HT or highly translucent Zirconia that represents the next generation of aesthetics for the Zirconia platform combining the outstanding translucent – with the proven stability of the Cercon base, it can be used for fully contoured crowns and bridges even in the posterior region.

Further testing is shown even less wear on opposing teeth than traditional porcelains used in metal in glass-ceramic restorations. We anticipate introduction in the U.S. before year-end once we receive regulatory approval. In addition to the new products introduced in the second quarter, we remain very pleased with customer acceptance to the innovations we launched earlier in the year. And particularly, we’re very pleased with our early reactions of the two other major introductions in the endodontics franchise namely the Gutted Core [ph] Obturation System and the Qmix 3in1 irrigating solution. The other was the reciprocating file and motor system these products really have begun to define the next generation of root canal therapy.

We’re also very pleased with the market acceptance of the ChemFil rock advanced glass-ionomer restorative with the superior mechanical properties and simple file placement process. Our early assessment is that this product will help us to gain a solid foothold in glass-ionomer category with minimal cannibalization risk to our existing restorative product lines. Finally looking forward, I would comment on the R&D portfolio, in terms of the pipeline remains strong and I look forward to providing you with additional updates on these new launches as in other upcoming introductions as we move forward to future quarterly calls.

And I would like to turn the call over to Bill Jellison who will cover the financial results for the quarter in greater detail.

Bill Jellison

Good morning everyone, Bret covered most of our sales numbers but I’d like to add on couple of observations. First our geographic mix of sales ex-precious metals in the second of 2011 included the U.S. at 35%, Europe represented 42% and the rest of world was 23% of sales. Our sales mix has shifted somewhat for the OUS business due in part to the weakening of the dollar and the loss on business within the orthodontic area.

As you know, the weaker dollar in the second quarter which benefited our top line growth by 7.8%, our earnings per share are also benefiting from the translation benefits of a weaker dollar but are being partially offset by higher transaction related impacts as we sell many products produced in Europe to other parts of the world. This is negatively impacting our gross profit margin rates in the period. The sales and earnings impacts are consistent with potential impacts laid out in our investor relations presentation and a current exchange rates we expect the top and bottom line impacts will continue to be positive for the rest of the year. However, they would probably run slightly lower than those experienced in the second quarter.

Growth profit margins as a percentage of sales ex-precious metal content in the second quarter of 2011 were 55.8% compared to 55.4% for the second quarter of 2010. When compared to the same period last year, we were positively impacted by improved pricing and favorable impacts from the integration of acquisitions which were partially offset by negative impacts of foreign exchange. The negative impact of foreign exchange rates and the gross margin rate in the quarter was approximately 20 basis points. SG&A expenses were $211 million or 37.4% of sales ex-precious metals in the second quarter of 2011 versus 35.2% in the prior year second quarter. These expenses were higher than those in last year’s second quarter when measured as a percent of sales as we have maintained our investment in the orthodontic business, despite the recent decline in sales volumes from the disruption of supply.

This will continue to result in higher SG&A rates throughout the year and will impact us hardest in the third and fourth quarter of the year as volumes decline in orthodontics, well lately be more significant in those periods. We are also investing around key product launch this year to support new product growth and have this impact the SG&A ratio would have been around 36% on sales ex-precious metals. Operating margins based on sales excluding precious metals were 17.2% compared to 20.2% last year in the same period. Operating margins based on the sales excluding precious metals for comparative purposes excluding acquisition related activities and restructuring and other costs in both periods would have been 18.5% in the second quarter of 2011 and 20.3% in 2010.

These rates were also negatively impacted this year as we are supporting our orthodontic business despite decline in sales from the lack of product supply in this category. While we are beginning to see some supply begin to come back in this area, we do not expect to see real improvements until products supply is returned to normal which we believe may not occur until the first half of 2012. As we move into the back half of the year, we expect the impacts of the orthodontic product supply constrains will have a greater negative impact on the sales, operating margin rates and earnings per share as we experience the full impact of the supply chain disruption and the process of supporting this business through the rebuilding process.

As Bret noted, the impact from the Japanese disaster in Q2 was a negative $0.03 per share. This impact will likely be closer to a negative $0.06 to $0.07 per share in both the third and fourth quarters of this year before it begins to improve. Net interest and other expenses in the second quarter was $4.6 million compared to $6.6 million last year in the second quarter. This reduction in expense resulted primarily from higher net interest income associated with higher interest income and credit risk adjustment on the outstanding derivatives, which we highlighted as an adjustment for our non-GAAP earnings per share. It was slightly benefited by higher interest income on our cash balances as rates have increased slightly from last year.

The corporate cash rate in the second quarter of 2011 was approximately 18.8% and year-to-date is now 22.4%. This is a nice reduction from last year and is a result of two items. First, we are benefiting from a more favorable geographic mix, as our U.S. based income has been reduced due to the impacts of a weaker dollar and the negative impacts of our supply outage of orthodontic products. We expect this impact to gradually go away as our sales and earnings in this business are rebuilt over the next few years. We are also benefiting from the recently announced acquisition of Astra Tech. With this acquisition we will be able to more effectively deploy our cash flow as a result much less cash will be repatriated to the U.S., which will result in a lower average tax rate in 2011 similar to our year-to-date rate of 22% to 23%. And for several years moving forward based on the current tax laws.

The announced acquisition of Astra Tech allows us to efficiently utilize not only our current cash balances but also our future foreign cash flows. Equity and net income attributable to unconsolidated affiliated company reflects our investment in non-consolidated businesses. The income shown is primarily the result of the increased work and value of the convertible bond we hold in deal. This bond is fair value adjusted each quarter. 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, not our income statement until we convert the bonds, at which time it will run through our P&L but we will also flag that item as a non-GAAP adjustment.

Net income attributable to DENTSPLY International in the second quarter of 2011 was $74.2 million or $0.52 per diluted share compared to $72.4 million or $0.49 per diluted share in the second quarter of 2010. Net income attributable to DENTSPLY on an adjusted non-GAAP basis was $78.5 million or $0.55 per diluted share in 2011 compared to $73.9 million or $0.50 per diluted share in the second quarter of 2010. Cash flow from operating activities in the first half of 2011 was $165 million compared to $150 million in the same period last year, a 10% increase. Capital expenditures were $25 million in the first half of the year with depreciation and amortization at around $37 million.

Capital expenditures are currently expected to be in the $60 million to $70 million range for the year. Inventory days were 110 at the end of the second quarter of 2011 compared to 110 days at the end of the first quarter and 103 days at the end of last year. Approximately six of those days however is just the result of our higher FX impacts. We do not – we do some expect some additional improvement in the inventory levels by end of the year and really in fourth quarter. Accounts receivable days were 60 days at the end of the second quarter of 2011 compared to 57 days at the end of the second quarter in 2010.

At the end of the second quarter of 2011, we had $672 million in cash and short term investments. Total debt was $663 million at the end of the second quarter. Year-to-date we have repurchased approximately $80 million of our stock or approximately $2.2 million shares at an average price of approximately $36. Based on the company’s authorization remain up to 34 million shares of primary stock, we now have approximately 12 billion shares available for repurchase.

However as we have recently announced in our intent to acquire Astra Tech, we are now planning on repurchasing additional shares until we make some reasonable reductions in the debt used to complete that transaction. Finally, based on our performance in the first half, our gradual improvement in our underlying markets, continued benefits of a weak dollar and our current assessment of our orthodontic contingency plan, we are adjusting our 2011 full-year earnings per diluted share guidance to $1.92 to $2.00 on a non-GAAP basis excluding certain adjustments. This guidance also excludes a potential impact from our recently announced plans to acquire Astra Tech.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will pause for a moment to assemble the queue. We’ll go first to Jeff Johnson with Robert Baird.

Jeff Johnson – Robert Baird

Thank you. Good morning guys.

Chris Clark

Good morning.

Bret Wise

Good morning, Jeff.

Jeff Johnson – Robert Baird

Chris, you gave the Japanese update, so I guess either for you or Bret, we have been hearing you were getting some low tech supplies or probably not the right way to say it but, if some of the value products may be out of there but not the high-end self-ligating stuff. We thought you were may be subject or your supplier was subject to MHLW approval for manufacturing lines. Has that happened? And how do we think about the gaining if you’ve got manufacturing in place this approved, why take another two full quarters to start getting that, what’s kind of the rate limiting factor there?

Bret Wise

Hi Jeff, this is Bret. I’ll take a stab at this and if Chris may add some things to add to this. But with respect to product supply, yes, we’ve gotten a trickle of supply I’ll call it, too small shipments one on the non self-ligating product and recently we got actually a small shipment of the self-ligating product. The Japanese supplier is up and running on a very limited basis. They had some equipment installed and approved for export business to us. We shouldn’t assume though that because we have this small trickle supply that they’ve got all the equipment in place validated and ready to go and all the labor trained, because of course they had to do – they were having to replace some of their labor on this location. So this is going to be an ongoing process.

We do think – we’ll stiff back to see this continue to improve although I don’t think it will be linear. And this is one of those times that we’ll have to give you an update when we had the third quarter call. At this point, I think it’s reasonable to assume we will have limited supply in the back half of the year, not nearly the supply we had in the second quarter of course, because we had full inventories coming into the second quarter which was now completed. So I think this is going to be more of a process than an event of slow rebuilding of the capacity.

Chris Clark

Yes, Jeff just to add, I mean I think what it does for me is provide a greater confidence on the earlier comments, we’ve said that we think that by early next year, we’re going to be back up and running and they are going to be back up and running in terms of basically full supply.

Jeff Johnson – Robert Baird

All right. And Bret I guess, what are you hearing early on from your orthodontics at this point. When we talk about orthodontics there is a lot of them like to just buy everything from one group and understanding the Resolve brand could help mitigate some of the losses. Do you feel like most of your customers are just going to ship their purchasing to a competitor in the near term and not kind of bifurcate their purchasing to the Resolve brand and then get their high end stuff elsewhere. How are you thinking that’s going to play out in the next few months to quarters?

Bret Wise

I think that’s yet to be seen. We have very good relationships with our customers. Some of our customers of course don’t buy the self-ligating, they only buy the other series of products. I think with those customers, we’ve got a strong position and we’re probably we’ll keep that market share. With respect to one – customers that we’re primarily using self-ligating that we’re not able to try self-ligating, I think you’ll see a shift we called this temporary to one of the suppliers. And then of course, there is customers out there that have a mix and I wouldn’t expect us to lose all those customers that have a mix between self-ligating and the more traditional twin brackets, I think that we’re going to be able to compete at least in those with those orthodontics in the near term.

The other way I am thinking about it is that we start to get some supply back, of course we’ll be back in those offices with some limited offerings. And I think we need to keep in mind that the reason I used our brackets is because they like them best. So that’s going to play I think favorable for us as we go to rebuilt our market share here. My only other comment is I kind of alluded to in the commentary is that of course we haven’t taken out the sales and marketing infrastructure this business that we were fully maintaining that. We’re maintaining the relationships with the orthodontics. We’re in their offices, with the alternative offerings.

And I think that will help in recovery of the business and demonstrate self-commitments in longer term.

Jeff Johnson – Robert Baird

All right, great. And then one question on Europe and then maybe just a model question for Bill, but on Europe, Bret can you kind of give us an update on kind of the gaining throughout the quarter, maybe July so far, there is obviously a lot of concerns that are being raised across Europe in healthcare in general and that hearing good things at IDS in March, but may be started to taper off from there the number this quarter sequentially declined, I think for some reason you give us that makes sense but how are you thinking about Europe I guess in the second half?

Bill Jellison

Usually we don’t talk about months within a quarter, I think that’s dangerous to do because it’s difficult enough to measure business on 90 days when you’re on 30 days but with respect to this quarter, we saw the quarters turn our recently weak in April as we talk to our businesses and why that was, we’ve got the explanation as well for Easter Holidays. They’ve shut down and that affect we’ll see our customers shut down. That effect was mainly in the March last year.

Also we didn’t have IDS in March last year. We had it in this year. So that probably pulled some business out of it growing into March. And then sequentially we saw the quarter the operating performance improved throughout the rest of the quarter. And so if you looked at May and June you see much more normal ratios and growth rates compared to what we saw in April.

So I don’t think we like music, we’re just talking about one quarter or another quarter I think that’s what happened in the second quarter. As far as the overall business in Europe, we don’t see a dramatic change or what we seeing for the last we’ll say 18 months, the business appears to be solid. Of course it varies by country. Some of the countries in southern Europe where we’ve got severe budget problems I think are having a much harder time and those in Northern Europe. But I guess I would conclude it by saying, although we had this impact on our results in April, we don’t see those will change outside of that impact.

Jeff Johnson – Robert Baird

Okay, well that’s encouraging. Thank you. And then Bill, I guess then just a modeling question. EPS in the quarter, if top line impacted by 7% or 8% doing the typical math that you guide you one-third to two-thirds flowing through, probably $0.02 to $0.03 impact this quarter. Is that kind of how think about the next half of the year may be $0.02 to $0.04 total in the second half, since you said that lower and then anything in your guidance in that $0.04 or $0.05 raise to the midpoint of guidance, anything different in there from an FX or tax rate standpoint or how much is the FX and tax rate contributing to the rates in guidance?

Bill Jellison

Well I would say the tax rates we just stated that we’re expecting that lower tax rate not only through the rest of this year but kind of moving forward. So you can definitely expect as a tax rate as piece of that benefit some FX benefit, you know obviously we had FX projections for the year based on different levels, but I’d say that that’s had a little bit more favorable despite the negative impacts that we’re getting from the higher Swiss francs and the product that we sell out of Switzerland which is a lot of our endodontics related supplies that are hurting us, that’s why our gross margin rate is actually negatively being impacted by the FX despite the fact that we are still seeing a positive bottom line impact on foreign FX both during the second quarter. And I would agree in the last half of the year, it should – we still remain positive based on current rates within each of those periods.

Jeff Johnson – Robert Baird

All right, thanks guys.

Bret Wise

Thank you.

Operator

And we’ll go next to Jonathan Block with SunTrust Robinson.

Jonathan Block – SunTrust Robinson

Great, thanks and good morning.

Bret Wise

Hi Jonathan.

Jonathan Block – SunTrust Robinson

Good morning, may be just the first one, a quick follow-up on Japan and I know I am a getting a little bit specific but it seems that overall things are tracking as expect to may be a little bit better you mentioned bringing in some of the supply – limited supply, but if you just look at the math of recent impact this quarter and then roughly 6% to 7%, I believe Bill you said both in 3Q, 4Q and you shake out sort of best case, may be in that range below as $0.15 and as high as $0.18 or so versus or so versus your prior $0.12 to $0.17 tax. So am I just parsing a little too much or when you look at your overall guidance is there a couple of more pennies impact that’s affecting now from Japan?

Bill Jellison

Yes, that’s exactly what you should expect in our guidance that we just gave. So while we’ve got some positive things within that guidance that are bringing that number up, we believe that Japan is probably going to end up probably going end up probably in kind of that top-end of the original rates that we gave out there rather than the midpoint of that range. So we do think that despite some of the positive items that we’ve gotten on the Japanese side, I’d say that we expect the overall impact in Japan is slightly worse this year than kind of what maybe you originally expecting.

Jonathan Block – SunTrust Robinson

Okay, great. And then to shift over to new products, Chris this one is for you, you mentioned Wave One, seems like there is a lot of excitement out there when you launched in the U.S. this quarter, and that was a good problem to have trying to keep up with demand, but can you speak to what you’re seeing from may be the endodontics versus out of GPs on the uptake and then I know you guys have dominant share but are you seeing that Wave One is further in your share gains or is it still too early where you’re only supplying it to current customers as of right now?

Chris Clark

Yes, sure. In terms of the endodontics and the GPs we’re seeing currently good reaction from both. So I would characterize their target reactions as being very strong and positive pretty much across the board which is fabulous. In terms of the – I am sorry the second part of your question?

Jonathan Block – SunTrust Robinson

Just in terms if you’re seeing the share gain – if you’re seeing Wave One going on further your current market share right now in endodontics.

Chris Clark

I think it’s probably a little bit early to tell. We are getting some competitive conversions, we suggest that impacts we would expect some share gains as a result of that. We’re also obviously seeing some cannibalization as well which is a positive for us in terms of obviously moving from other brands that we sell to this. So I would say that it’s pretty much as expected and we’re very pleased with it.

Jonathan Block – SunTrust Robinson

Okay. And then Bret, so I guess you give a little bit more color on overall sort of the internal growth rates by within your divisions especially within specialty. Are you going to provide those numbers within implants and in endodontics – in orthodontics?

Bret Wise

We usually don’t get that granular, but I will tell you that this quarter our consumables were the strongest growth that we had, of course because there is no orthodontics in there and minor impact from Japan. Our specialty products were next primarily because the endodontics business is running very well with these new products launches but of course they’ve offset by the decline in orthodontics. And our lab business continued to run slightly negative in the quarter as we continue to expect now. Now we just launched this new product in the last week of June or early July in lab that as I first described and also its important to note that in endodontics we had not launched the new file system that we just discussed until I think it was the last week of June, because we got regulatory approval late in June.

So those were impacting those rates. Now in net all is as reported not ex-ortho or not ex-Japan.

Jonathan Block – SunTrust Robinson

Okay, perfect. Thanks very much guys.

Bret Wise

Thank you.

Operator

We’ll move next to Robert Jones with Goldman Sachs.

Verdell Walker – Goldman Sachs

Good morning. This is Verdell Walker standing in for Rob Jones, I just have a couple of quick questions here. First on just the general environment. In times of the discretionary demand, are you seeing uptick in demand for more discretionary procedures or is this still like predominantly on the basic side. Just trying to get more color on what you’re seeing on the ground both in the U.S. and OUS from a procedural thought?

Bret Wise

Okay, I’ll take a stab at that. One thing I’m never beginning here is because what’s going on in the orthodontics business, we don’t have an access or we don’t have a real good regroup [ph] to discretionary procedures, because that’s one of the primary discretionary procedures. Absent that, well I think we continued to see good traffic flow at our customers offices for both general dentistry and for specialty work which would be advanced endodontics which is very strong for us right now because we’ve got four new products launching in the implant sector.

So I don’t think we’ve seen a noticeable change frankly since Q1 in traffic flow or appointment books being slower or weaker at the dentist level.

Verdell Walker – Goldman Sachs

Okay, great. And also just to confirm on the tax going forward, we didn’t expect that to be in the 22% to 23% range for ‘011 for a couple of years going forward, right, just to make sure I have that correct?

Bill Jellison

Yes, I think if you are excluding the Astra Tech transaction the combination of that, so as our business kind of stands at this point you should expect that our current outlook on the taxes kind of in the 22% to 23% range. I would say also that as it relates to Astra Tech, that we have now done the Astra Tech conference call that we had earlier, we stated that the cash rate would be slightly negatively impacted from that because they do have a slightly higher tax rate that us but I’d probably say somewhere in the may be point to two points higher than the 22% to 23% range but I just gave you one, the Astra Tech is going to (inaudible).

Verdell Walker – Goldman Sachs

Okay, great. Thank you.

Bret Wise

Thank you.

Operator

We’ll go next to John Kreger with William Blair.

Ravi Fadah [ph] – William Blair

Hi good morning guys, this is Ravi Fadah in for John Kreger today. If I could just ask a kind of a similar question to what was just asked about utilization, some other health care services companies have started to talk about reduced utilization in the hospital and not sufficient office markets recently. And actually earlier this week, we heard some similar comments from a dental practice owner as well. So from your perspective just to confirm things like utilization trends are in line with the first quarter, you did not see any deterioration?

Chris Clark

No, we didn’t see a notable change. I think dentistry probably, I think more stable than some of those other areas of healthcare you see in the hospital and so forth. And we’ve actually seen people continue to see the dentist do some of the preventive work with the appointment books where we saw them before. Although we’re – as you were appreciating we’re using kind of a sampling technique here as you would as well. So from our viewpoint, we don’t see those will change from the first quarter compared to these table are slightly improving.

Ravi Fadah – William Blair

Great. And then one another question on Japan, so you talked I think about 2012, you mentioned that you think earlier in the year you might get back to a more normal level of inventory? Do you expect to step down from Q4 to Q1 so from $0.06 to $0.07 in the fourth quarter, do you expect it to go to $0.03 in the first quarter to $0.00. How do we think about that?

Bret Wise

So I think as I mentioned as you kind of move through this year, the negative impacts of $0.06 to $0.07 are really hitting kind of what we believe is kind of the worst level position in our orthodontic business, that’s when we’re fully out of product. We aren’t really building up the supply yet. As we move into the first quarter on a year-over-year comparison perspective, it will probably still be negative obviously than it was in the first quarter of 2011 because again the first quarter of 2011 really didn’t experienced any of that impact. I think as you should move through the year, we would expect obviously the back half of next year to be much better in the orthodontic area than it was in the back half or expected to be in the back half of this year.

And so as you moved kind of between the fourth quarter of this year and the first quarter of next year, we would expect that impact – our negative impact on the ortho side is probably going to be a little bit less sequentially, but it will be actually worse year-over-year.

Ravi Fadah – William Blair

Got it. And then one last question on acquisition, Bret you mentioned the acquisition of the laser company is probably a little bit more hi-tech than you’re probably used to. Does that suggest that future acquisitions could be more focused on the equipment side rather than consumables or am I reading too much into that?

Bret Wise

I think you are reading a little bit too much into it. This is a small company that’s one of the leaders in let’s call it the smaller desktop lasers that are used to many obituaries for convenience. It fits very well with some of the other parts from our portfolio where we have small equipments and so forth. And in particular in this case, its assigned to a category that’s used in dental surgery which we thought was important. So I wouldn’t think this is really small equipment or large equipment, I wouldn’t take this translated into a strategic structure.

Ravi Fadah – William Blair

Got it. Great, thanks very much.

Bret Wise

Thank you.

Operator

(Operator Instructions) We’ll go next to Scott Green of Bank of America/Merrill Lynch.

Scott Green – Bank of America/Merrill Lynch

Hi, thanks for the questions. So in this quarter internal growth was around 3.4% ex-Japan versus in the first quarter I think you said low 4% ex-Japan. And so does kind of Europe shifts may be around Easter and IDS pull through, is that what accounts for the Delta in your view and so neutralizing for that it’s kind of stable sequentially, is that how you will describe it?

Bret Wise

I think it’s pretty way to summarize it. Yes, we saw the European markets much slower year-over-year in April and then return to more rates. And we think that’s – you take Europe is our largest region and that shifted from 4% to 2% and I think that’s why you see this sequential overall internal growth rate ex-Japan or the moderating this from that.

Scott Green – Bank of America/Merrill Lynch

Okay. And then may be another way to ask about momentum in the business last quarter you highlighted that you were starting to see some favorable mix within the categories to more premium products. Did that continue in the second quarter?

Bret Wise

That’s one think it was a little bit hard to detect the cost, a 100,000 SKUs but I would generally yes, it did in that the new products we are bringing out are getting a very warm reception and those are typically the most advanced technologies and highest prices. So I’ve had an indicator of that mix shift, that would be it. And of course we see actually a very warm reception for the new products we’ve been bringing to market even though at a premium price.

Scott Green – Bank of America/Merrill Lynch

Okay. So do you sense that there are more kind of gains to be hand in the market just on kind of normalized on – kind of normalizing utilization or from here can get more towards the 4% to 5% historical average global market growth. Do you need to see more substantial job gains and more substantial economic improvement?

Bret Wise

Well I think we’re kind working with the low-end of that range now, even though we don’t have any job or substantial improvement. I think we are thinking about this is that there is some very bad unemployment information based into base line now. I don’t think there is a point we get worse and thus we think that as we see some slow improvement in the economies that that will all be upside and probably push the growth rate back into that normalized range 4% to 6% for the market.

We’re not far off that, now though I think I would reemphasize, I mean now that the bad news is in the baseline we’re kind of getting close to the normal growth rate and a pickup in employment of course would be upside from here.

Scott Green – Bank of America/Merrill Lynch

Okay. And then I guess my question on Japan, the way you described it is your expressing to see production backup to the normal levels is in the early part of 2012 is what may be preventing a $0.17 snap back next year, the market share, you’ll have to recoup?

Bret Wise

Yes, I think that’s fair to say, we’re realistic about this. We are hopefully – we’re lowering our customers to some of our competitors right now. And we want to call them back in, but it is a competitive marketplace. We are keeping the rest in place. We’re keeping the SG&A in place, put marketing resources in place. So we’re going to be going out in the market and trying to win that customer base back. But as you kind of mentioned it’s not really a rubber band or something that has to happen over time.

Scott Green – Bank of America/Merrill Lynch

Okay, all right. And any updated view on how much of that market share you’ll be able to get back over the course of 2012?

Bret Wise

No, we haven’t speculated on that at this point.

Scott Green – Bank of America/Merrill Lynch

Okay. And may be one last year, last quarter you had spoken about implant symposium, that you were hosting in June in the U.S. And I was curious how that went versus your expectations?

Chris Clark

Yes, Scott, its Chris, I think that went – we were very, very pleased with the growth with the reactions and certainly the participation and engagement. It was fabulous event. I think it gave us an opportunity certainly to emphasize some of the advancements in the clinical techniques that we have as well as the product line. Certainly it just happened to come right after the announcement of the Astra Tech acquisition. So certainly that was a nice for folks as well. So I think we were very, very pleased with the reaction.

Scott Green – Bank of America/Merrill Lynch

Okay, great. Thank you.

Bret Wise

Thank you.

Operator

We’ll move next to Larry Marsh with Barclays Capital.

Larry Marsh – Barclays Capital

Thanks and good morning everyone. Just a couple of clarifications if I could, one would be just components of guidance just to make sure, I am understanding magnitude correctly. So if you want to think about this year, the 4% to 5% midpoint uptick seems to be dominated by tax rate, may be you will get a little bit benefit from FX offset as you said by may be $0.03 or $0.04 incremental impact in Japan, given that higher end of your range. Is that the right magnitude?

Bill Jellison

Yes, I think that (inaudible) keep in mind that on the tax side because we’re really booking the half way years and benefit running through the second quarter that the benefit that we’re seeking up on tax is about a split that that’s kind of what we’re expecting on a normalized basis of each of that remaining quarters. On the FX side, this is probably the second quarter as I mentioned really earlier you know as we got through the first quarter, that we expect at least a current exchange rates that the second quarter is going to be probably the highest benefited quarter for the year associated with FX although we still believe at current FX rates that we’ll probably be north of 5% but lower than the kind of the top line impact that we’re getting this quarter on FX. And I think that that’s reasonable for both the third and fourth quarter at this point.

Larry Marsh – Barclays Capital

Okay. Bill, in your prepared remarks did you give you – could you give – can you quantify the specific top line benefits from currency?

Bill Jellison

Well the top line benefit it was 7.8% for this quarter and then in next couple of quarters it’s just little of north somewhere between 5% and that point I think is (inaudible) change.

Larry Marsh – Barclays Capital

Okay. And just – but as you had said, I think an important message is tax rate is going to be structurally lower going forward before you add on Astra Tech, so on an annualized basis, why shouldn’t we think this sort of new thought of tax rate, all of the things equal gives, you $0.07, $0.08, $0.09 annually as a base even on a go forward basis, versus my prior expectation which was closer to 25.5% tax rate?

Bill Jellison

Yes, I think on the $0.07 yes, exactly you talked about based on the rates that we just discussed. I think that that’s a reasonable expectation. Keep in mind that probably a good quarter that benefit may be a little bit more is really associated with the negative impact that we’re getting right now from having that U.S. and geographic mix associated with the ortho. However if that tax rate does go up a little bit because FX hopefully that means that our orthodontic business is snapping back a little bit quicker and then if that’s the case, then hopefully you’ll also get the benefit of the improved performance there. But I think that’s a fair assessment. If you’re thinking kind of may be in kind of in the nickel of share kind of range excluding kind of the negative mix impacts from the tax. We expect the tax should be a realistic position moving forward.

Larry Marsh – Barclays Capital

Okay, great. Can I just have two other quick things? I wanted to make sure I understood correctly is your message, Bret really that you feel, what perhaps as confident or not more confident that you’re going to be able solve for this supply chain issue in Japan and now it’s just a matter of getting those customers back that as you said, you’ve learned to competitors. So it sounds like you’re maybe more confident that you have got the fix in place for next year, or is that being too aggressive in terminology?

Bret Wise

No, I think since we last spoke in one half we’re now more than 90 days out from the disaster. Well we’re almost a 120 days now from the disaster. And when we’re last operating we’re like 30 days out. So the encouraging signs are, one, we are getting a triple supply and that happened – that’s happened pretty quickly. And they had removed their equipment, install it, validate it, get approval and now they’ve started shipping in, they’ve had to train employees. I would note that doesn’t mean they can get back to full capacity rapidly, I think that’s certainly a process but the trickle of supply that we have now received came quicker than we thought it would.

So it also looks like it’s a matter of time now, right, the improvement in the business product of the equipment and the new facility and to rebuilding the capacity, that’s much more favorable than it was 90 days ago when we weren’t certain to how or when it could get any capacity back on line. So now they have some and I think that, it’s a matter of times till we get back to full production again.

Larry Marsh – Barclays Capital

Okay, that’s yes, good news. And one other thing, then just to make sure I understand Bret, obviously you have been in the business for long time and your message I actually you can tell there really is a stable to somewhat improving environment, you’ve already built in sort of the base case of fairly high unemployment in your numbers anyway, what do you think would cause you to have to kind of revise your thinking, especially you say the U.S. as you look at into next year that would – that is not in your thinking today?

Bret Wise

Larry, I am not going to speculate about what changes might happen in the future, broad economic issues are hard to predict, at least they are hard to predict for me. So I think that we’ll give you an update on 2012 and so forth as we get to the end of the year. But at this point as far as we can tell the dental markets are stable and reacting about as we expect them to.

Larry Marsh – Barclays Capital

Right again, so you imagine even with the news of late the feedback you are getting is that it’s stable and performing as expected. So that’s the message there. Then final question and this may be more Astra Tech related, I know this the second call but just remind us again, assuming it closes this year or early next year your ability to deploy capital to do things like selectively buyback stock and look for tuck-in acquisitions. Is that going to be altered or temporarily held at bay as you integrate or remind us again of the capital allocation post close [ph]?

Bret Wise

Well transaction would still have substantial liquidity. We’re establishing our bank arrangements and the bond transactions for this transaction that we will maintain a very, very strong liquidity position in the balance which will allow us to do things selectively. I think the message this morning though was that probably as you expected as the debt reduction would be much higher priority for us especially in the medium and near term after we close the transaction.

Larry Marsh – Barclays Capital

Okay, pretty good. Thank you.

Bret Wise

Thank you.

Operator

We’ll go next to Brandon Couillard with Jefferies.

Brandon Couillard – Jefferies

Hi, thanks for taking the question. Bill, do you have any greater visibility on the financing calls for the Astra Tech deal at this point, and when do you expect to finalize the financing for that transaction, will you pre-fund that deal in the third quarter by chance?

Bill Jellison

Sure, right now we actually literally just took down our revolving our credit agreement so we replaced the one that we had out there which was $200 million facility. We upsized that facility to about $500 million. We’re also going to add an additional piece of that revolver at the point in time that we close which is another $250 million piece which lasts for about a year. On top of that we’ve got in the neighborhood of around $1 billion of additional financing made up of a series of 10 year bonds, some two to three years bonds at least expected right now. But we’re looking at a number of different things at this stage. But our expectation is that we will have that finding and thing in place yet this third quarter on whether the transaction is closed or not.

Brandon Couillard – Jefferies

Okay, and do you have an update on the revenue contribution from acquisitions for the year?

Bill Jellison

This is excluding Astra Tech?

Brandon Couillard – Jefferies

Yes, excluding the Astra Tech, I guess for the 3 deals you’ve done so far.

Bill Jellison

Yes, it’s going to run kind of somewhere between half a point and a point probably for the rest of this year.

Brandon Couillard – Jefferies

And any chance you could break out the mix of price versus volume in the period?

Bill Jellison

Breakdown the mix of price and volume is that what you’re saying? As we’ve mentioned and probably running this year somewhere in the 1.5% to 2% range. And I think that’s a fair assessment across the board. Some line some divisions are obviously higher than and other ones are closer to even flatter to up slightly. But I think that that’s a good strong range and I’d say that that range is what I was probably may be a little bit better than probably what we’re seeing in the last couple of years.

Brandon Couillard – Jefferies

Okay, great. Thank you.

Operator

We’ll go next to Jonathan Block with SunTrust Robinson.

Jonathan Block – SunTrust Robinson

Hi, guys just one quick follow-up. On MTM, congrats, it looks like you did get approval over in Canada, and I’m just not that familiar with your plans on how to rollout. It looks like on Wave One you’re willing to do a European launch and then a U.S. launch on a later date. For MTM is that something that you would pursue in Canada, and then rollout in the other territories as the regulatory approvals come in, or do you hold off until you get at least Europe as well?

Bret Wise

John, we’ll go ahead and watch in Canada, we got an approval there and then as we get approval elsewhere we’ll go ahead and roll it out as well.

Jonathan Block – SunTrust Robinson

I appreciate it. Thanks.

Bret Wise

Thanks.

Operator

And that does conclude our question and answer session for today. At this time I will turn the conference back over to our speakers for any additional or closing comments.

Derek Leckow

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!