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DENTSPLY International Inc. (NASDAQ:XRAY)

Q3 2011 Earnings Call

October 27, 2011 8:30 am ET

Executives

Derek Leckow – Vice President, Investor Relations

Bret W. Wise – Chairman and Chief Executive Officer

Christopher T. Clark – President and Chief Operating Officer

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

Analysts

John Kreger – William Blair & Company, LLC.

Jeff Johnson – Robert W. Baird

Jonathan Block – Suntrust Robinson Humphrey

Verdell Walker – Goldman Sachs

Steve Busha – Morgan Stanley

Scott Green – Bank of America/Merrill Lynch

Brandon Couillard – Jefferies & Co.

Operator

Good day and welcome to the DENTSPLY International Third 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

Thank you very much Ellisa, and many thanks to each of you for joining us today to discuss DENTSPLY International’s third quarter 2011 results. Joining us on the call from our location in Europe is Bret Wise, Chairman and CEO; and I’m here in New York with Chris Clark, our President and COO; and Bill Jellison, our Senior Vice President and CFO. Each of us will have some prepared remarks and then, we’ll be glad to answer any questions that you may have. I’d hope you all had a chance to review our press release and supplemental materials, which we issued earlier this morning. A copy of the press release and these materials are available for downloading on our website www.dentsply.com in the Investor Relations area.

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.

As you can see in the release, our results for this quarter reflect the Astra Tech acquisition and included a number of non-recurring items and a substantial increase in non-cash amortization of acquired intangibles. In an effort to provide clarity, from the distortion of some of these items, our comments on this call focuses on results including certain adjustments which are noted on the non-GAAP reconciliation tables contained in the release. You’ll note that our forward-looking earnings guidance also reflects results excluding all the related amortization charges. This information is also highlighted in the supplemental material we’ve provided on our website.

With that, I’d like now turn the call over to Chairman and CEO, Bret Wise. Bret?

Bret W. Wise

Thank you, Derek and good morning everyone. Thank you for joining us on our call this morning. This morning we are very pleased to announce record sales for our third quarter of 2011. As noted in the release and as Derek mentioned, our results in this period of course are heavily influenced by the Astra Tech acquisition, including a number of non-recurring items and also the impact of the product outage in our orthodontics business. Accordingly throughout the call, we’ll provide you with insights into what our results would have been without the guidance.

We’ll also update you on how we see the global dental market developing at this point then provide with some updates on both the Astra Tech integration and a status of our orthodontics recovery plans.

First, from a revenue perspective, we recorded revenue, which was a record revenue for our third quarter of $619.8 million as reported in $563.8 million ex-precious metals. Total sales growth [XPM] increased 14% has the strongest growth rate that we’ve seen since second quarter of 2008. Our constant currency growth was a positive 9.6% in the quarter including a negative internal growth of 1.1%. However, as you know, that’s heavily influenced by the product supply outage in our orthodontics business. And our acquisition growth in the period was 10.7% reflecting the Astra Tech acquisition for one month as well as five other smaller transactions that we completed in the last year. (Inaudible) growth rate of course are inclusive of our Japanese and our orthodontics business, both of which are heavily impacted by the natural disaster that occurred in Japan at March. If you look at the internal growth excluding the sales in the Japanese market and orthodontics the internal growth rate was positive 3.6% for the quarter and constant currency growth was over 15% for the quarter.

Our internal growth benefitted from mid single digit growth in both the tier side consumable category and also our specialty products and of course that exclude the orthodontics products and that was offset by a slight negative internal growth number from the prosthetics group.

Our currency translation was also positive in the quarter; it added 4.4% of sales. Total growth through nine months is 9.5% including constant currency growth of 5.0%. Internal growth through nine months is a positive 0.9% and a plus 0.39% excluding orthodontics and our sales industry in Japan.

For geographic internal growth, I want to give it you both as reported for the quarter and then also separately without orthodontics and the effects from the market in Japan. So as reported, internal growth was a negative 2.3% for the US, negative 3.8% for Europe, and a positive 5.3% for the rest of the world. Again, that’s heavily impacted by the supply outage in orthodontics. So excluding orthodontics and our sales in Japan, internal growth for the quarter was a positive 3.2% in the US, a positive 0.3% in Europe, and a positive 10.8% for rest of the world. And in Derek’s opening remarks he commented that there is some supplemental information available at our website, which includes the internal growth both with and without the orthodontics and Japanese effect.

Looking at these results again, ex-ortho and Japan there are couple of I think, obvious implications. First, the US market has clearly improved at least from our perspective it has. We saw a good growth year-over-year in consumables and specialty again, excluding orthodontics of course, and lab was also positive.

In Europe, it’s also clear that the market there overall has slowed a bit, however, it’s important to note that the extend varies quite a bit by region and product class. Our results in Europe were impacted by more than a four-percentage point by the decline in precious metal alloys, the market decline in precious metal alloys, as volumes in that market have declined substantially on record gold prices. Also I suspect it’s not surprising that there continues to be some rough market dynamics in Southern Europe, but conditions in Northern Countries seem much more stable.

Given the economic turmoil we see in the southern regions of Europe, we believe there is some continued risk of slowness in that region for the rest of the year and we’ve reflected that in our updated guidance that we’re providing today.

With respect to the rest of the world, our 10.8% internal growth again, ex-ortho in Japan for the quarter and 10.6% year-to-date reflects continue strong opportunities in many dental markets throughout the world. We are seeing good growth rates in the Pacific Rim, Latin America, Middle East and Australia. So these are pretty diverse markets of course, but to us this in 2011, many of these are moving in the right direction.

Overall, despite some doom and gloom talk about the global economy, the industry continues to chuck along as it has in the past, pretty resistant to economic fluctuations.

As far as our own results are concerned, we continue to be pleased with what we see as above market growth overall, and again ex-orthodontic outage. And we’re particularly happy with the performance of our new product pipeline. Like, I’d say customer reaction to the range of new products we’ve launched this year across various of our strategic business units has been really positive.

With regard to earnings, we’re pleased with the results, which were slightly better than what we had expected. Our earnings per share on a GAAP basis were down slightly, but this is a pretty messy quarter with the impacts from the acquisition and the orthodontic supply headwind and several other items of note of course.

Bill is going to provide you with some details on these items whilst a bridge to our non-GAAP results probably brief here. But overall on a non-GAAP basis, EPS was $0.46 per share that’s essentially the same as last year, but this is after a $0.04 to $0.05 per share reduction from the orthodontics business and the business in Japan. So those businesses would have been flat with the prior year our non-GAAP earnings would have been up approximately 10% for the quarter.

Regarding the orthodontics recovery plan, Chris is going to speak to this in more detail in a minute. But I think in general, it’s important to note that it feels like we’re getting very close to an inflection point in this business. I think the earnings drag the next quarter maybe a little higher than in the third quarter, but we expect to see sequential improvement in results as we enter next year. We’ll have some tough year-over-year comparisons for the next with say, two to three quarters, but we believe this unit will become a source of earnings growth again in the back half of next year as we recapture market share.

We’re also very happy to have closed the Astra Tech transaction earlier than we had previously thought possible. Our two teams are working very closely together on integration and prioritizing our opportunities. I think its also fare to say that having now spent close to two months in the integration, we’re enthusiastic about the opportunity and likewise, we’re very comfortable with the assumptions we made in the transaction including the accretion numbers that we had provided to you previously.

We remain confident, this transaction will be accretive even in 2011 without substantial synergies and of course, we expect the earnings growth to accelerate there after.

In our reported results we of course include all of Astra Tech acquisition growth, but had we reflected their organic growth in September the one month that we own them of course, it would have been accretive to the growth rates that we’re reporting to you today. Overall, I’d say on the Astra Tech, acquisition is going very well at this point.

Lastly, on earnings guidance, this quarter we’re reflecting guidance excluding the amortization of purchase intangibles from acquisitions as Derek had noted. For all of our acquisitions prior to July 1, 2011 this amounts to about a penny per share per quarter or about $0.04 per year. So, given that this was not in our prior guidance of $1.92 to $2 per share for all 2011, you should think of that prior guidance is now being $0.04 higher or $1.96 the $2.04 per share for all 2011. And today of course, we’re increasing that guidance to $2.01 to $2.07 per share for the full year reflecting, I think a number of factors. These include on the positive side accretion from the Astra Tech acquisition, growth prospects for the remainder of the year in the US and the rest of world regions, and slightly less of a drag that we previously expected from the orthodontics and Japanese business for the full year.

On the negative side, we can now see the conditions in Europe will likely be a bit slower, and the effects of currency are likely to be much less positive in the fourth quarter than what we’ve seen thus far for the year.

But overall, we’re pleased to be increasing the guidance by $0.05 on the low end and $0.03 on the high end for all 2011.

That concludes my prepared remarks. I’d like to now turn the call over to Chris who is going to provide us with an update on the orthodontic recovery plan and also the Astra Tech integration. Chris?

Christopher T. Clark

Thank you, Bret and good morning everyone. I’m going to take few moments as Bret mentioned and try to provide some deeper insights into our progress on the orthodontics front as well as an update on the integration efforts relative to Astra Tech.

With respect to orthodontics, we’re receiving increased shipments from our key Japanese supplier. Although, I should note that this improvement continues to be gradual. You may recall that I mentioned on our last call that we’ve just received an initial shipment of self-ligating product from our supplier. We are now generally receiving weekly shipments of both self-ligating and non self-ligating products although with levels well below our requirements and our historical levels. We’re basically at this point receiving more frequent, but still only partial shipments.

Our suppliers are continuing to make efforts to expand capacity and we continue to anticipate return to full availability across the various product lines sometime during the first half of next year.

To attempt to help bridge the gap on the non-proprietary products that we received from them, we are continuing in the interim to market alternatively source product received from other suppliers, marketed under the resolved brand name. We’re currently allocating available product from our Japanese supplier by geographic region and by product line, as we want to ensure we can meet as higher percentage of demand as possible in an individual market for specific brands.

As we entered the fourth quarter, I think we are in better shape than three months ago. As we entered Q3, we are basically close to a complete product outage from our Japanese supplier. Now, we’re receiving consistent albeit incomplete shipments and that we expect this to gradually improve as we move forward.

Excluding the impact of a particularly tough comparison this coming quarter, we believe should begin to see sequential improvements in the business. Due to the stronger prior year period results, the sequential improvement will like to be masked in the fourth quarter, but should be more evident moving forward from there.

So to summarize, I think we’re making the gradual sequential progress that we anticipated previously recognizing that this will be a multiyear recovery effort to get back to the market share that we enjoyed prior to the Japanese natural disaster.

Before moving off of ortho, I’d like to take a moment and publically comment our orthodontics team for their dedication to help our customers through this difficult period. Their professionalism and focus have been exemplary and reinforce our commitment to ensure that we keep the right organization in place to lead us back to strong above market growth as the supply situation improves, recognizing that this does create negative short term impact on our operating margin.

I’d now like to provide some brief comments on the Astra Tech integration efforts. We continue to be very impressed with the caliber of the Astra Tech team, as well as very pleased with the similarities between the cultures of our two companies. Their commitment, innovation and clinical reference (inaudible) really appears are own. And these similarities will certainly pay dividends for us as we move forward.

With respect to the integration process, we have initiated a joint integration team with dedicated resources from both DENTSPLY and Astra Tech with the support of external consulting resources all focused on maximizing the value of transaction. Their efforts are focused on identifying and implementing the optimal structures and processes to maximize the value of both the dental and the healthcare businesses, achieve our sales and operating synergy objectives, and not much larger implant business to further increase market share in the premium implants moving forward.

I would characterize the approach of the Astra Tech and DENTSPLY teams in this process as both very engaged and highly collaborative, and the process has a lot of positive energy focused on the significant opportunities created by the transaction. Our assessment is that these opportunities before us are even more compelling than what we anticipated through due diligence particularly with respect to the aggregate natural implant and digital dentistry portfolios.

I will also add that we are pleased with the business performance of both the Astra Tech and our own implant business during this initial integration period as the teams are capably juggling the demands on the ongoing business for the additional focus on integration activities.

While we have not yet seen announcements of Q3 results from some of our public implant competitors, both the Astra Tech and [free event] implant platforms grew upper mid single digits organically during the third quarter indicating that both implant portfolios are continuing to gain market share.

The urology business also continues to perform well with steady growth behind the new compact LoFric catheter in particular.

I look forward to providing additional updates as to our integration efforts on future quarterly calls. So I now like to turn the call over to Bill Jellison, who will cover the financial results for the quarter in greater detail.

William R. Jellison

Thanks, Chris. Good morning, everyone. Bret already discussed our sales growth within the quarter, but I’d like to add a couple of additional comments. First our geographic mix of sales ex-precious metals in the third quarter of 2011 included the US at 36%, Europe represented 40% and the rest of world was 24% of sales.

Our rest of the world is now nearly 25% of our total sales, these regions continue to gain importance as they’re growth is expected to continue to outperform US and European markets. Our sales mix will shift a few points more once Astra Tech is fully included for the entire period as its sales are obviously more heavily weighted within Europe.

Despite the recent strengthening of the dollar within the quarter, we’re still benefited from a slightly weaker dollar year-over-year in the third quarter, benefitting our top line growth by 4.4%.

Our earnings per share also benefited 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, but this is negatively impacting our gross profit margins within the period.

The acquisition of Astra Tech does increase the volatility changes in FX rates that have on our sales and earnings on as more of our sales and our production is now located outside of the US. We are most impacted on sales by changes in the euro and our purchases and cost structures are most impacted by the Euro, Swiss Franc, Swedish krona, and also the Japanese yen. We will be utilizing additional systematic cash flow hedges on certain transactions in the future to help minimize the volatility that these FX fluctuations may otherwise have on our business. And at current exchange rates, we expect the fourth quarter impact of exchange to be closer to neutral on our bottom line than the positive impact we’ve had in the first few quarters.

As Derek mentioned and as you can see in our earnings release, the quarter included a number of items, which impacted our results, which we have identified as non-GAAP adjustments. Most of the following comments exclude the impacts of those items.

Gross profit margins on an adjusted basis as a percentage of sales, ex-precious metal content in the third quarter of 2011 were 55.9% compared to 55.7% for the third quarter of 2010. When compared to the same period last year, we were positively impacted by improved pricing and product mix as we benefit from stronger gross margins in the Astra Tech business. However, these benefits were nearly offset by negative impacts of foreign exchange movements.

The negative impact of foreign exchange rates on the gross margin rate in the quarter was approximately 80 basis points. So on a constant currency basis, gross margins were up nearly 4-percentage point on an adjusted basis. The Astra Tech is expected to have a positive mix impact on gross margin rates over the next year as this business again is consolidated into the company’s results.

Our SG&A included approximately $13 million of acquisition and integration expenses and the other adjustments. Absentees cost, SG&A on an adjusted basis would have been $218 million or approximately 38.7% of sales ex-precious metals, within the third quarter, versus 36.6% in the prior year’s third quarter. Both the impacts from supporting our ortho business during the supply outage and the addition of recent acquisitions will have a negative impact on this percentage rate until this time next year when these items are fully reflected in both years.

Astra Tech, which now runs with much higher SG&A expenses than our base business is expected to have a greater negative mix impact on SG&A expenses as a percent of sales over the next year as this business again is fully consolidated into the company’s results. With out the impacts of ortho and the Japan situation and our acquisition expenses, we would have been about flat as a percentage of sales in the period on an adjusted basis.

Operating margins based on sales excluding precious metals on an adjusted basis were 17.2% compared to 19.2% last year in the same period. These rates were negatively impacted this year from the costs incurred supporting the infrastructure of our orthodontic business, impacts of FX movements, and from the combination and higher expense levels of recent acquisitions.

Astra Tech is also expected to have a negative mix impact on operating income rates over the next year as its business is consolidated into the company’s results and as their current operating performance is below DENTSPLY’s operating income levels as a percentage of sales. We expect that this impact will be mitigated over time as we realize the benefits of synergies of the combined businesses.

As Bret noted, our Japanese natural disaster have negatively impacted our earnings per share by approximately $0.04 to $0.05 in the third quarter. This impact will likely be approximately $0.06 per share in the fourth quarter of this year as it was a stronger quarter for our ortho business last year.

It is expected to begin to show sequential signs of improvement as we finish up the year and also enter into next year. Even with sequential improvement though, we expect this business will have a negative impact on results in the first half of next year measured on a year-over-year basis.

Net interest and other expense in the third quarter on a reported basis was $20.8 million compared to $5.3 million last year in the third quarter. This increase in expense resulted primarily from net interest expense associated with the acquisition of Astra Tech, and approximately $12 million of expenses associated with the closing of that transaction, which we highlighted as an adjustment for our non-GAAP EPS. We were also slightly benefited by higher interest income as rates have increased slightly from last year.

During the quarter, we had a successful closing of our acquisition of Astra Tech and the financing associated with that transaction. The transaction was financed with approximately $650 million of cash and approximately $1.2 billion of additional debt, primarily financed by issuing public debt with maturities ranging from 2 years to 10 years at an all in average cost of approximately 3.6%.

Our reported tax rate for the quarter is not really meaningful as there are significant tax adjustments that we removed from our non-GAAP numbers. The most notable of this is a $47 million tax benefit that is being recognized based on the expected recovery of net operating tax loss carry forwards that we will now likely recover as a consequence of the Astra Tech acquisition.

On an adjusted basis excluding tax adjustments, our operating tax rate for this quarter was 23.8% and year-to-date is now 23%.

The tax rate continues to have a slightly favorable impact compared to last year and is the result of two items. First, we are benefiting from a more favorable geographic mix as our US 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 will gradually go away as our sales and earnings in this business are rebuilt over the next few years.

We are also benefiting from our recent acquisition of Astra Tech. With this acquisition, we will be able to more effectively deploy our cash flow and as a result, much less cash will be taxed when repatriated to the US, which is resulting in a lower average tax rate in 2011. We also believe this rate will be reasonable when looking toward next year based on current tax loss. The announced acquisition of Astra Tech allows us to efficiently utilize not only our current cash balances, but also our future foreign cash flows.

Net income attributable to DENTSPLY International in the third quarter of 2011 on an as reported basis was $60.6 million or $0.42 per diluted share, compared to $63.7 million or $0.44 per diluted share in the third quarter of 2010. Net income attributable to DENTSPLY on an adjusted non-GAAP basis was $66.2 million or $0.46 per diluted share in 2011, compared to $66.3 million or $0.46 per diluted share in the third quarter of 2010.

Our supplemental material provides a more detailed bridge of the adjustments that are highlighted in both our quarter as well as our nine-month or year-to-date numbers.

As Bret noted, the current year number is reduced by approximately $0.04 to $0.05 per share due to the supply outage in orthodontics, absent that, we would have shown some nice earnings growth within this quarter.

Cash flow from operating activities in the first nine months of 2011 was $246 million compared to $249 million in the same period last year. But keep in mind; we had a number of payments in the quarter for acquisitions, financing related costs, legal settlements and other items of approximately $40 million, which negatively impacted operating cash flows within this period.

Capital expenditures were $45 million in the first nine months of the year with depreciation and amortization now at about $64 million.

Inventory days were 104 at the end of the third quarter of 2011 compared to 106 days at the end of the third quarter and 103 days at the end of last year. These levels now reflect the addition of Astra Tech inventory as well.

Accounts receivable days were 60 days including a slightly higher days from Astra Tech at the end of the third quarter of 2011, compared to 59 days at the end of the third quarter in 2010. At the end of the third quarter of 2011, we had $82 million in cash and short-term investments and our total debt was $1.84 billion at the end of the third 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 to remain up to $34 million of treasury shares, we have now approximately 12 million shares available for repurchase. However, as we’ve now completed our acquisition of Astra Tech, our preference will be working to pay some this debt down, before we utilize the remaining authorization although, we will more likely continue to offset our options.

Finally as Bret stated, we are pleased to be increasing our earnings guidance for 2011. As you recall, our previous earnings guidance was $1.92 to $2 per share on an adjusted basis. As we are now identifying all the amortization of purchased intangibles on a non-GAAP item, we wanted to clearly point out that amortization from transactions completed before July 1 of 2011 would add $0.04 to our previous guidance making our prior guidance on a comparable basis $1.96 to $2.04. As we look toward year-end, we’re comfortable raising our guidance for earnings on an adjusted basis to $2.01 to $2.07 per diluted share. 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

(Operator Instructions) We will go first to John Kreger from William Blair.

John Kreger – William Blair & Company, LLC.

Hi, thanks very much. Bill, I think you said in your prepared remarks that the weaker dollar helped the bottom line, but can you quantify by how much?

William R. Jellison

Yeah, it was probably in the range of $.01 to $.02 per share roughly this quarter.

John Kreger – William Blair & Company, LLC.

Excellent, thanks. And any kind of early thoughts on the 2012 outlook; I’m guessing you’re not going to give official guidance until the next quarter, but any other things we should be thinking about as we adjust models such as new product introductions and so forth?

William R. Jellison

Yeah, I mean at this point, John, we really don’t – can give out any kind of direction for 2012 and we won’t be really doing that until our next quarter conference call.

John Kreger – William Blair & Company, LLC.

Okay, thanks. And then just one final one; can you talk a little bit more broadly about the trends you saw across your different implant lines. I think you quantified the Astra implant lines. How did your own implant business do?

Christopher T. Clark

Yeah. Hi John, it’s Chris. Both of those grew upper mid-single digits. So if you look at it, we were pretty pleased with both of those lines and I think that’s indicative of gaining market share and behind two really good platforms.

John Kreger – William Blair & Company, LLC.

Okay, thanks very much.

Operator

We will go next to Jeff Johnson from Robert Baird.

Jeff Johnson – Robert W. Baird

Thank you. Good morning guys. Bret, I was hoping I could start with you, the US organic growth number 3.2%, pretty impressive. Wondering, how much of that do you think is maybe DENTSPLY specific with some of your new endo products and other products out there versus market just because that’s a little bit different than maybe what we were hearing for the market as a broader comment for third quarter?

Bret W. Wise

Jeff, the strength we saw in the third quarter was pretty strong across all lines. The endo products, the new products in endo are doing very well. The new products in restoratives are doing pretty well, the implant line did very well, lab was positive but obviously was below the average growth rate that we mentioned there. So it’s interesting because I’ve seen a number of surveys which says things must be weakening in the US and we are just one company but we have a pretty broad sales base in US and we are seeing strength across, I would say, numerous platforms that we have today, of course the one exception that is Orthodontics for obvious reasons. It’s not isolated to one line or another at this point.

Jeff Johnson – Robert W. Baird

All right, that’s helpful. Can you provide any color maybe on what US or worldwide endo or general consumables might have done?

Bret W. Wise

Yeah. Worldwide the consumables were very strong kind of mid single digits. The specialty businesses in total were kind of mid-single digits excluding ortho, organic of course. So I think I mentioned that in the prepared remarks both consumables and specialty products ex-ortho were mid-single digits worldwide.

Jeff Johnson – Robert W. Baird

Okay. Great, And then Bill a question for you just on the Astra Tech side; you previously guided to the first 12-months being $0.12 to $0.17 accretive. Obviously Europe has slowed here a bit, dental implant market you know plus or minus may have changed a bit, but you also eliminated intercompany loan hedge you’ve got the Swissy now take to the euro that might help manufacturing cost on dental implants in Switzerland. So just wondering you know how you’re conceptually thinking about that $0.12 to $0.17 guidance; will you update that number or at least qualitatively talk around it?

William R. Jellison

Jeff I don’t think that we are planning and talking anything specifically about the Astra Tech business or our broader-based any of our specific divisions in the future as well either. Although Bret, clearly pointed out that, as well as Chris, that our integration processes I think are moving along positively.

We are very impressed with the wide range of talent that exists in the associates within that team. I think both teams are working closely together. And at this point, we are very confident that this year will show accretion within that area. And I would say that there is a number of factors that obviously impact that acquisition in the growth rate, but we are pleased with how our regular business is running right now and we are pleased with the opportunities that this acquisition brings to us.

Jeff Johnson – Robert W. Baird

And last just maybe a follow-up there Bill; on the accretion of Astra Tech, I think in the past you guys have talked about it being back-end loaded in that first year as well. Do we think in fourth quarter that we’re actually on the cash side or even with amortization included, get any accretion out of it or is that more of a 2012 of that?

William R. Jellison

No, we are expecting that it will be an accretive, accretive to earnings this year already.

Jeff Johnson – Robert W. Baird

Already. Okay, that’s all I’ve got thanks guys.

Operator

We’ll go next to Jonathan Block from Suntrust.

Jonathan Block – Suntrust Robinson Humphrey

Okay, great, thanks. Bill, you maybe clarified this with your last call, but I guess I might even ask you to parch it a little bit more, I mean essentially even after all the moving parts, you’re raising guidance by about $0.04, it looks like currency probably moved to a little bit against you since the last time you updated us when you closed the acquisition early. So is there a way to maybe even parch the $0.04 in terms of what’s coming from the accretion from Astra Tech, what if anything moved against you from FX and what’s attributable to call it core DENTSPLY business model?

William R. Jellison

Well, I think probably the only one piece that you can really pick out based on kind of what we said there was I gave you roughly an idea on kind of how the FX was within the third quarter. We’ve said that that's obviously changing and it's going to probably look more neutral to us moving forward. So obviously that has, is more of a headwind in relationship to kind of what we, maybe we previously expected in July.

But I'd say the other categories really across the board that Bret pointed out, both the broader-based markets with our base business performance, the performance within our ortho business that is probably a little bit better than what we had expected in July, but right at the midpoint of kind of what we originally expected at the beginning of this year when the earthquake first happened. And I think that he also clearly stated that we’re confident that we will have accretion from at least the acquisition this year.

Jonathan Block – Suntrust Robinson Humphrey

Okay, great. And then maybe turn over to the orthodontic’s business, I just want to make sure I’m thinking about this properly. So $0.06 impact expected roughly in the fourth quarter; that would be the peak, working your way down from there but still negative in the first half of ’12 and then crossover in the back half of ‘12. Is that correct? And the second part of the question would be; you mentioned increased shipments from the supplier. Is there a way to put a percentage on, you know hey, we’re now getting 20% of ourselves while getting volume back or 30%? Thanks guys.

Christopher T. Clark

Yeah, it’s Chris. I would say Jonathan the progression that you described is pretty similar, pretty accurate to the way we’re thinking about it. So from that angle, I think that’s correct.

In terms of, I’m not going to comment in terms of a specific percentage mainly for competitive reasons, but you know, as I indicated before, we’re getting more regular, but partial shipments at this stage. It is getting better, it is a gradual process, they are continuing to expand capacity, but again, obviously this was a tremendously significant event, obviously for them and they’re poise and they’re resilient, but it is a gradual process.

Jonathan Block – Suntrust Robinson Humphrey

Okay, great. And last couple of questions. First one, Bret for you, I know you don’t like to give a lot of color inter-quarter, but again, your US number was quite honestly better than what we were expecting. Was there anything inter-quarter that you sensed or was there pretty much stable July though September maybe even any commentary into October, if you could. And then, Chris the last one for you would be, are you now meeting demand on WaveOne. You know, that looked like that it was going to be a great product for you guys I think, you were trying to catch up to the demand last quarter, where are you, right now? Thanks guys.

Bret W. Wise

Okay. I’ll go first and then, Chris can comment on WaveOne. With respect to within the quarter, I don’t really think it’s meaningful to try to measure the business with the markets and weak implements or even a monthly increment. Particularly the third quarter, because Europe in particular gets to be very slow during the vacation period of late July to late August. But I think overall, with respect to the global markets we saw really good, strong conditions in the US and many of the rest of the world categories Europe did slow, as we commented, but I don’t think there is any trend within the quarter, but you’re asking specifically about the US. If there was any trend specifically in the quarter that would make us believe that it vary greatly from one period to another. Chris, you want to talk about the last topic?

Christopher T. Clark

Yeah, regarding WaveOne, I mean, obviously, we’re very pleased with the market reaction to it. We increased the focus to actually we were leader in terms of the introduction in the US than we were in Europe and the rest of the world. So in Q3, we were just beginning to get some momentum on that in the US. What I would say is that the backorder, we still do have backorders. We have increased capacity and certainly running hard at the present problem that we have. But I would characterize the level of the backorders is below what they were when we chatted three months ago.

Jonathan Block – Suntrust Robinson Humphrey

Great. Thank you, guys.

Operator

We’ll go next to a Robert Jones from Goldman Sachs.

Verdell Walker – Goldman Sachs

Good morning, everyone this is Verdell Walker in for Bob Jones. I just want to start really, really quickly on the Japan situation. I see you guys are backing out from orthodontic business continuity costs in your non–GAAP reconciliation. I was just trying to get a sense of like an addition to the sales force expenses that you are going to be incurring, maintaining your sales force to this. What are these other expenses that you’re going to be incurring as you deal with this situation, is it like promotional activity or anything else like that, just little bit more color on what that is exactly.

Bret W. Wise

I think all the promotional related activities of launching new products and everything else or platforms will all be running through regular operations. We would not be excluding any of that. Some of the continuity cost areas are really for support cost to ensure that the employees throughout this period are solely committed to the business. They are staying with the business and ultimately going to be driving the business on the backside of it as we ultimately get new products.

Verdell Walker – Goldman Sachs

Okay, thanks. My next question is could you just talk a little bit around your debt repayment assumptions. I know that’s a big focus for you guys even more so than the share repurchases. Just trying to get an idea how you’re thinking about progressing that?

Bret W. Wise

Well, I think on you can obviously see the level of cash flow that we’ve already got kind of this year on a year-to-date basis. We generally generate significant amounts in both operating cash flow as well as free cash flow. Our expectation for that cash flow moving forward here and the primary focus on that will ultimately be for debt repayment. So as we get to kind of the back end of next year, we would be expecting to have paid down a nice piece of the debt already I mean, probably really for the next two years that’s our primary focus.

That does not mean that we might not have some tuck in acquisitions that we still do within kind of that first two years, but if we did, I would expect that those would be relatively small. So you can expect to use the majority of kind of the free cash flow side for debt repayment at least in the first couple of years. So, roughly a good kind of probably rule of thumb is maybe in the $250 million range possibly plus a little bit depending on what availability we’ve got to do that pay down.

Verdell Walker – Goldman Sachs

Okay, great and last question. If you’ve already answered this on Astra Tech, I apologize. I had to hop on from another call, but at the time you announced Astra Tech you discussed like a current implant market growth maybe around 4.5% with the idea that your implant business both combined and Astra Tech and legacy DENTSPLY to grow above that if that was the assumption then like, what’s your assumption now in the growth outlook for the implant market. And if those accretion targets you had talked about at $0.12 to $0.17 in the first 12 months haven’t changed, what is the offset if your market growth assumption has come down and similarly, your original expectations for [years] three were about $0.30 to $0.40 if I remember correctly, so what were their marketing growth assumptions behind that guidance?

Bret W. Wise

Yeah, well this is, Bret, I’ll comment on that briefly. At the time of the announcement, I think we said in the near-term, we expected the dental implant market to kind of grow low-to-mid single-digits. We think that longer-term it could be high single-digits maybe very low double-digits, but that’s we didn’t assume that recovery would happen immediately we thought that would take some time.

And that seems to be the case at this point. We do see some companies in that market you know growing mid-single to even a little bit stronger to mid single digits we’re in that category, but I think one other things we commented on in our guidance today is that, we’ve now been you know through the integration process, been in the company for 60-days. We’ve been able to look at the assumptions we made and in our view they were very solid even now that we have more information and in fact, that was one of the reasons that we were positive about the accretion number in 2011. So we’re comfortable with the assumptions we made including those that we gave to the investment community at time of transaction.

Verdell Walker – Goldman Sachs

Okay, so that $0.12 to $0.17 is still in tact?

Bret W. Wise

Yeah, we are comfortable with the accretion numbers we gave to the Street at the time of transaction.

Verdell Walker – Goldman Sachs

Okay, perfect. Thanks so much for the questions.

Operator

We’ll go next [Yudan Wang] from Deutsche Bank

Unidentified Analyst

Thanks very much. It would be great if you can give us a sense of how your legacy dental implant business performed in the region. So US, ex-US and also how Astra Tech’s dental business performed in those regions. Thank you.

Bret W. Wise

This is, Bret. We don’t give breakdowns by regions for any of our product lines and I don’t think we should start that with the dental implants. I think the comments that Chris made earlier with respected to both our system and Astra Tech system growing, I don’t exactly – remember the exact words you used, Chris, but like strong mid-single digits?

Christopher T. Clark

Yeah. Up or mid-single digits.

Bret W. Wise

Yeah. Globally is the guidance we’re really standing behind or the information we want externally. So, we’re not going to give a regional breakdown of the various product lines we have.

Unidentified Analyst

Okay. Are you able to say whether the US business grew faster than the ex-US business?

Bret W. Wise

Yes. The US business did grow faster than the outside US business.

Unidentified Analyst

Okay. And that grace that you indicated for Astra Tech’s dental business seems to suggest that it has actually slowed in the third quarter by, I'd say that compared to the momentum that it had in the beginning of the year. Can you talk about what have driven this slowdown?

Bret W. Wise

I'm not sure that that's correct actually that it has slowed. So, I’m not going to comment on whether it slowed or not. I don't think that it has slowed.

Unidentified Analyst

Okay. And then finally on the integration of the Astra Tech dental business, can you talk about how that integration would proceed and how you would operate it with DENTSPLY’s existing implant business given that the way these two businesses are well managed, were very different?

Bret W. Wise

We’ve deepened the integration process. As Chris mentioned, we've got a team of Astra Tech executives and team of DENTSPLY executives working on that. We haven't made any public announcements of how the business is going to be integrated at this point. So, when we get to the point of being ready to announce that publicly, we’ll pass that on to the shareholder group as well.

Unidentified Analyst

Okay. Presumably it's also too early to say how long it will take you to integrate in what sort of disruptions we should factor in at this stage?

Bret W. Wise

Yeah. There's no timeframe announced for integration. I think both systems continue to perform very well even with the distraction by the way, of being sold at Astra Tech and now with the integration underway. They are going to implant business, it’s operating very well as is ours.

Unidentified Analyst

Okay, great. Thank you.

Operator

(Operator Instructions) We will go next to Steve Busha from Morgan Stanley.

Steve Busha – Morgan Stanley

Hi, good morning. Thanks for taking the question. Bill, I wonder if you could spend a bit more time trying to quantify the changes to the lines of the P&L, particularly SG&A and gross margins as you look at some of the non-organic change given the Astra Tech integration and the updated treatment of amortization; and if you could give us a sense for how that might be different in the fourth quarter given that you’ll have a full quarter of Astra Tech that would be really helpful. Thanks.

William R. Jellison

Yeah, I think this is – we had Astra Tech in our business for one-month year and we did say that as we move forward, two things will in essence be shown into a little greater degree on the impacts. First of, Astra Tech’s business in general had higher average margins than DENTSPLY’s average business, so you should expect that that benefit on the margin side for that mix benefit of the acquisition will be greater in the 4Q and as we move forward.

The flip side of that is that the overhead structure of their current business is obviously well above DENTSPLY’s levels, so our SG&A related side is going to be higher and it will obviously be driving, that impact will obviously be nearly three times the impact within the fourth quarter. But as far specific expectations beyond that we aren’t really giving any additional guidance.

Steve Busha – Morgan Stanley

Okay, on sticking with Astra Tech; well number one, thank you for the commentary and the granularity on the implant businesses. Number two; building on that, can you comment on the organic growth for Astra Tech as a whole and for the non-implants, the medical business lines and then hopefully give us a sense for how that is trending relative to the first half of the year?

William R. Jellison

I'm not going to give any specific guidance on that, other than to say, the healthcare side of their business performed very well in the month we’ve owned them, I mean we got all 30 days of their numbers and our numbers. We said that we acquired that business and intend to run it because we like the business model both the growth rates and the margins and the creativity that’s in that business. So the comment that Chris made of course was about their implant business, but I would say it appears even the healthcare business has done very well also.

Steve Busha – Morgan Stanley

Okay, great. Thank you again and have a great morning.

Operator

We will go next to Larry Marsh from Barclays Capital.

Unidentified Analyst

Hey guys, good morning. This is (inaudible) filling in for Larry. Bret, just a quick question for you. I want to follow-up on some of your Europe comments. I think it came in a bit below we’re expecting obviously, you expanded on some trouble in the Southern countries in precious metal alloys and couple of other things. I know you guys aren’t giving guidance for 12 but sort of qualitatively now one month into Q4 and looking towards 2012, are some of these issues sort of still sort of going on here and some we could expect the next few quarters before we kind of resumed some of the growth we use to seeing in over in Europe or it is more of a progress to quarter specific issue?

Bret W. Wise

The issues in Southern Europe, I don’t believe those are quarter specific. I think that the economic situation there is going to be difficult for some time and we have seen the difficulty they’ve had coming up with a real solution; there is an announcement today, I guess this morning, that they appear to have made some progress there. But at least with respect to Southern Europe I'm not sure that’s isolated this quarter. Northern Europe continues to perform reasonably well to much more of a steady environment, and I don’t see any reason to change our view on it at this point on the northern regions of the European continent.

Unidentified Analyst

Okay thanks, it’s very helpful. And Chris, may be a quick one for you. Just (inaudible) implant discussion. Just (inaudible) some of the pricing dynamics here from margin perspective particularly on the premium implants side. Could you just comment on you know (inaudible) the pricing dynamics change throughout the past, you know one, two years or so that you’ve noticed and now coming into 2012 here kind of the pricing dynamics in the premium side of the market; have those changed materially at all kind of sort of as it’s expected.

Christopher T. Clark

Yeah, we really have not seen any significant changes in pricing dynamics. We’ve been able to certainly on the accretive side has on price increases and have done that relative to both product line. So from that angle we are not seeing the need for significant increases and discounting or anything like that in terms of driving the growth rates that we’ve seen.

Unidentified Analyst

Okay, thanks guys.

Operator

We’ll go next to Scott Green from Bank of America.

Scott Green – Bank of America/Merrill Lynch

Hi, thanks for the questions. So first could you elaborate a little more on your product launch outlook for 2012, I know you've spoken a lot about how successful the 2011 line up has been and to the extent that it’s been supporting results this year; how do you think about the line up next year on a relative basis?

Bret W. Wise

I’ll make two comments; one is, new products and brands introduced in the dentistry take several years to kind of ramp up, so even though we’re seeing some benefits from the new product launches this year, we should see continued benefit from both same products for the next couple years. The pipeline of products that have yet to be launched and that will likely be launched in 2012, our view is kind of a normal level at this point. 2011 was a little bit higher than normal and I'd say 2012 was more than normal level. We can probably give an update on the status of the pipeline when we talk on our year-end call.

Scott Green – Bank of America/Merrill Lynch

Okay, all right. Thanks, and then in the US, looking back, I think in the third quarter of 2010, you had spoken about a tough equipment comp that maybe drove a little weaker results in the US and I was wondering if that maybe set the stage for an easier comp into this quarter or do you view the results in the US (inaudible) in ortho as a good run rate to consider going forward?

Bret W. Wise

Chris, I'm going to ask if you have any specific comments on…

Christopher T. Clark

Yeah. No, the small equipment comp really was not a significant factor in terms of the Q3 results. So I would say, with respect to Q3 that’s above what we think. We think that’s a pretty accurate reflection what the business is doing.

Scott Green – Bank of America/Merrill Lynch

Okay, great. Could you update us, maybe I missed this part, any price increases you implemented on October 1 and if that might have had any pull in from the fourth quarter?

Christopher T. Clark

Yeah. I mean we implement price increases on most of our consumable businesses in the US and in Europe. October 1, that have been the timing for the last several years, so that's in the base period as well. I would say in aggregate, the impact in terms of any impact form Q4 into Q3 is very similar to what it was last year. So again, I don't think there's a whole lot of distortion in our aggregate results associated with that.

Scott Green – Bank of America/Merrill Lynch

Okay, okay, great. And then lastly you gave good directional guidance on the Japan issue setting into next year, so sequentially it gets easier each quarter, but I guess on a net overall basis it’s still a nicely positive tailwind to earnings in the aggregate next year, is that correct?

Bret W. Wise

Well, I would say you know keep in mind, I think once your anniversary kind of the impact, so once you kind of get through the first half of the year, then I think that you can assume that that should be begin to be more accretive year-over-year. But in the first half, despite the potential sequential improvements in the first and second Q, year-over-year those periods will probably still be negative. So you’re not going to get the benefit until probably the third and fourth Q and for the year, you might get absolutely some slight positive.

Scott Green – Bank of America/Merrill Lynch

Okay. Sorry.

Christopher T. Clark

Recognize of the event was March 11, so it really didn’t impact Q1 and we certainly had inventories coming into Q2. So while we had an impact that impact was really leader in the quarter.

Scott Green – Bank of America/Merrill Lynch

Okay, so a modest benefit to 2012. It seems more fair and then you’d anniversary this – annualize this benefits in 2013 as it all goes according to plan.

Bret W. Wise

Yeah, I think that that’s fair and as we get into the back half of 2012, I think that’s also fair that we should be seeing some improvements.

Scott Green – Bank of America/Merrill Lynch

Okay, thank you.

Operator

We will go next to Brandon Couillard from Jefferies.

Brandon Couillard – Jefferies & Co.

Hi, good morning.

Bret W. Wise

Good morning.

Brandon Couillard – Jefferies & Co.

Bret, just quickly on the US trends, I mean is that your sense that the strength in the US, I mean was attributable to any type of better utilization trends. Or is it, would you characterize it more as a function of price in some of the new product contribution?

Bret W. Wise

I don’t think it was price, specifically. Utilization trends are hard for us to really get a hand on except in our direct businesses. I think for us it was really a strong uptake on the new products, it seemed to us that dentists were buying a little bit more aggressively than they had before. As we already commented that we did the normal price increase and we saw about the normal buy heads that wasn’t bad. Our view is that, across all of these platforms things just improved in the US just got better.

Brandon Couillard – Jefferies & Co.

Okay, thanks and then, Chris on the new product front, should we expect the same level of new product launches in the back half of this year as we saw through the first half and then, any update you have on MTM or the Sensodyne collaboration would be helpful as well.

Christopher T. Clark

Yeah. In terms of the overall level, if you will in terms of new product launches, we were probably front loaded this year. We commented on that this year was pretty much a heavy year for us in innovation and it was no doubt in terms of the timing of the introductions probably more front loaded than back loaded. That said, we introduced some new products in the third quarter, I didn’t highlight those in my comments, but one that which I would highlight would be on the preventive business the RDH Freedom Cordless Prophy handpiece that is a significant improvement versus the coated handpiece that hygienist typically for prophies. So, I mean there is a number of new product launches still in the third and fourth quarters that we look to bring into market, but I would characterize that as more normal levels.

In terms of MTM, I'm not going to comment specifically on timing in terms of the US launch, because again it is depending on regulatory approval and that’s not something we can predict really easily. What I would say is that we are now just launching it in Canada. So obviously, we’ll look at that as a test market to try to optimize our launch programs if you were moving forward.

In terms of the Sensodyne collaboration, we’re work with them on a number of fronts. I would say, that there are some areas with that, that we’ve been pleased with in terms of the results and some areas that have been a bit more challenging, really not going to get into a lot more specifics in that, but I would say that, again, I think we’re certainly better for the collaboration as a result.

Brandon Couillard – Jefferies & Co.

Thanks. And then lastly, Bill any update on the CapEx or operating cash flow expectations for the year.

William R. Jellison

Well you can see that, we spent probably around $45 million so far through this period. I think that you know something probably around the $60 million maybe you know $60, a little bit north of $60 might be reasonable, but and it really depends on how those flow in, but I think that that’s what you should expect for this year and you’re probably going obviously see a bump in that again next year.

Brandon Couillard – Jefferies & Co.

Okay, great. Thank you.

Bret W. Wise

Thank you.

Operator

We’ll go next Jeff Johnson from Robert Baird.

Jeff Johnson – Robert W. Baird

Thanks, guys, just two quick follow-ups here. Bill, what was the change in the equity and affiliate client there swing into a nice positive number this quarter?

William R. Jellison

As far as the non-controlling interest portion, part of that was being backed up. As you can see on the non-GAAP related items that was a move on the deal investment that we’ve got associated with it, but it’s really the performance of really both of those businesses, both of the businesses that we consolidate and backout a piece of, but then also the deal operations.

Jeff Johnson – Robert W. Baird

Okay. So the 15.97 numbers that’s in the P&L you did back a little bit of that out (inaudible) one of the disclosures.

William R. Jellison

Yeah, that’s correct.

Jeff Johnson – Robert W. Baird

Okay. I’ll take a look there. And then, lastly, I know a lot of discussion here on kind of how ortho might or might not pace back in over the next couple of years. But Chris, I think you made the comment you don’t think about this as a multiyear recapture of some of those lost sale. Over the next two or three years as you recapture that if that kind of happens in ratable increments, 20%, 30% a year for a couple of years, two years something like that. Is it safe to assume that the margin on that business then kind of ratably have improved two or three period. I'm assuming there are some variable costs in there, but there is a lot of fixed cost and so it's kind of like a margin driver for a few years. Is that a fair assessment?

William R. Jellison

Yeah. I'd say Jeff, we may get some leverage, but recognize that we don’t manufacture. So, it’s not like you get leverage comments through your own manufacturing plant with that.

Jeff Johnson – Robert W. Baird

Yeah. I just got to think some of the overhead costs, the absorption of some of those overhead costs that you do have in that business, it just gets better and better absorbed over a two or three year period as you ramp that backup?

William R. Jellison

Yeah. Certainly, relative to absorbing an SG&A rate in particular yes, I would say less on the gross profit rate.

Jeff Johnson – Robert W. Baird

Yeah. That makes sense. All right, thanks guys.

Operator

And at this time, we have no further questions.

Bret W. Wise

Well, thank you, everyone. That concludes our conference call for today. We thank you for your interest in DENTSPLY. If you have any follow-up questions, please contact Investor Relations. Good-bye.

Operator

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

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