DENTSPLY International's CEO Discusses 1Q 2012 Results - Earnings Call Transcript

| About: DENTSPLY International (XRAY)

DENTSPLY International Inc. (NASDAQ:XRAY)

1Q 2012 Earnings Call

May 1, 2012 8:30 a.m. ET

Executives

Bret Wise – Chairman, Chief Executive Officer

Christopher Clark – President, Chief Operating Officer

William Jellison – Senior Vice President, Chief Financial Officer

Derek Leckow – Vice President, Investor Relations

Analysts

Glen Santangelo - Credit Suisse

John Kreger - William Blair

Larry Marsh - Barclays Capital

Jeff Johnson - Robert W. Baird

Jonathan Block - SunTrust

Steve Beuchaw - Morgan Stanley

Riddell Walker - Goldman Sachs

Yi-Dan Wang - Deutsche Bank

Brandon Couillard - Jeffries

Operator

Good day, everyone, and welcome to the DENSPLY International First Quarter 2012 Earnings Conference Call. Just as a reminder, today's presentation 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, Vicky, and my thanks to each of you for joining us this morning to discuss DENSPLY International's first quarter 2012 results. Joining us on the call today are Bret Wise, Chairman and CEO, Chris Clark, President and COO, and Bill Jellison, Senior Vice President and CFO. We'll have some prepared remarks this morning and then we'll be glad to answer any questions that you may have.

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 also available for downloading on our website, www.dentsply.com. We have also provided a set of supplemental slides that is available for download as well.

Before we get started, it's important to note that this call may include forward-looking statements involving risks and uncertainties. These should be considered in conjunction with the risk factors and uncertainties that are described in our SEC filings. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. A recording of this call in its entirety will be available on our website.

As you can see in the release, our results this quarter include a number of non-recurring items and other non-GAAP adjustments. In an effort to provide you clarity from the distortion of some of these items, our comments on this call will focus on results including certain adjustments which are noted on the non-GAAP reconciliation tables contained in the release. You'll note that our earnings guidance is also on an adjusted basis.

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

Bret Wise

Thank you, Derek. Good morning, everyone. Thank you for joining us on our call this morning. We're very pleased to report record sales and adjusted earnings for the first quarter 2012 this morning. Overall, I think its fair to say that the global dental markets are stable and growing. Certainly, the markets are strong in U.S. benefitting from a now expanding economy, some job growth and pent-up demand for dental procedures.

In Europe the markets continue about at the pace that we saw in the fourth quarter last year. Slow growth in the north and recessionary conditions in the south, but, overall, I'd say the European dental markets continue to show some modest growth.

With this backdrop we're pleased to report what we view as a pretty strong results for Q1. Let me give you a few highlights to start, then Chris is going to cover the Astra Tech integration and speak to our opportunity in emerging markets. And, then, finally, Bill will provide some more details on the financial performance.

So, as noted in the release, sales as reported were $716 million, that's up 25.6% and, excluding precious metal content, sales were up 26.3%. Both were records for the first quarter driven primarily by our 2011 acquisitions, most notably Astra Tech, but reflecting continued improvement in internal growth, building off what was a strong finish we had in fourth quarter 2011.

At a high level internal growth continues to be driven by a wave of new products we launched in 2011 and some additional momentum we're picking up now from 2012 launches, as well. Our growth, excluding precious metals, for the quarter breaks down as follows: Total growth, as I mentioned, was 26.3% as comprised of internal growth of 1.1%, acquisition growth of 27.2% to result in constant currency growth of 28.3% and a negative currency translation of 2.0%.

Internal growth at 1.1% was, again, negatively impacted by the natural disaster last March in Japan, specifically, causing supply outage in orthodontics. Excluding Japan and orthodontics, internal growth for the quarter was 4.5%. That’s the best we’ve seen since pre-recession and its coming up against a reasonably strong 3.8% internal growth in last year’s base line.

Geographic internal growth, and I’ll give you this first in total and then without orthodontics in Japan. So, first, in total, internal growth XPM, including ortho and Japan, was a positive 3.5% in the U.S., again, that despite the headwinds we faced in orthodontics. There’s a negative 1.1% in Europe and a positive 1.3% for rest of world.

Now, again, those same statistics without ortho and Japan, which is probably a better measurement for us at this point, internal growth XPM was a positive 7.4% in the U.S. That’s a continuation, essentially, of what we reported in the fourth quarter last year. Internal growth in Europe, ex-ortho, was a positive 2.2% and that’s slightly below what we had in the fourth quarter, but we think still well above what the market is growing in Europe. And, rest of world, ex-ortho and Japan, was a positive 4.4%.

On geographic growth, again, this is ex-ortho and Japan, in the U.S. we saw very strong results, essentially, across all business categories. So, ex-ortho, all categories, including specialty consumables and lab, reported mid to high single-digit growth and in some categories double-digit growth.

New products launched, both last year and early this year, continue to drive very high customer acceptance and are driving growth well above market. Likewise in Europe our internal growth of 2.2% is likely well above the market and, again, is driven by new innovation. While we’re very pleased with this performance relative to the market, I think it’s fair to say we remain cautious on the European economy and the European market given the uncertainty in that region. In rest of world we were up 4.4%, which is an improvement from what we had in the fourth quarter, but we see some upsides from here moving forward.

As far as product categories are concerned, our internal growth, ex-ortho and Japan, was mid single digits, this is global now, and specialty and consumables in low single digits in prosthetics. The trends were generally the same we saw in the fourth quarter except for prosthetics, which is now showing positive growth even with the drag of the alloy market which is converting away from precious metals. And, as you know, we have a large market share in that market.

In implants, looking at our combined business on a pro forma basis as if we had owned Astra Tech for the first quarter last year also, our internal growth was mid single digits, actually, it’s probably fair to say towards the low end of mid single digits. Although this was a bit weaker than we saw in the fourth, our growth in the U.S. was very strong, double digits, and in Europe it was barely negative, less than 1%.

Our rest of world continues to show positive growth overall with some ups and some downs by countries or regions.

On earnings, and Bill will have more details on this in a moment, we were pleased to see that adjusted gross margins expanded nicely this quarter, driven by acquisitions, but also by the price increases we implemented late last year. Our expenses were also up and as we expected, because Astra Tech had a much higher expense ratio than the base DENTSPLY business. So as we merge that into the results, of course we're getting a natural inflation of that expense ratio, and that ratio is also, of course, affected by the cost we're incurring to sustain the orthodontics business, anticipating a re-launch mid this year. So obviously we expect that to improve moving forward.

As noted, the orthodontics supply situation continues to create operating margin pressure for us. However, we've now anniverasaried the initial supply shortage, and therefore we believe now that the worst of the year-over-year comparisons are behind us. For the first quarter this depressed earnings between $0.04 and $0.05 per share. In the second quarter this should diminish and then it should turn positive beginning in the third quarter. Our supplier has made substantial progress in expanding capacity, and we continue to expect a re-launch of that line mid-year. I think it's important to emphasize that although we are expecting sequential improvement in this business, we do view this as a multi-year rebuilding process for the business.

On Astra Tech just a few comments. We're now launching the integration and have gone live in North America with one combined entity and sales force. Christ will comment further on this first stage integration, but from a high level it's going very well. We're also moving forward with our integration strategy outside North America. However, timing of that strategy will vary by country or region. Overall, the integration is on track and in line with, or in some cases, ahead of our expectations.

One last point is that we're very excited about a global event taking place next week in Sweden. Astra Tech is hosting a symposium for approximately 2,500 customers in Gothenburg. This is an event that's held every three to four years, so it's really a great opportunity to introduce our new organization to our customers and also demonstrate what we can accomplish together.

Our earnings performance, non-GAAP came in at $0.52 per share. That's up 4% from the prior year quarter. This, of course, reflects the negative $0.04 to $0.05 year-over-year negative comparison for orthodontics. If orthodontics had been neutral, year-over-year adjusted earnings gain would've been in the low to mid-teens.

Looking forward, remain confident with our earlier guidance of 222 to 230 adjusted earnings per share. I'd say our confidence has increased by our first quarter results in both sales and earnings. Our increase in confidence in the orthodontics recovery plan, continued strong results from the acquisition and integration, but it's tempered somewhat as we stay vigilant on the outlook for Europe and currency movements.

On the quarterly progression of earnings, Q2 will still have some lingering downside year-over-year in ortho, which we expect to turn positive year-over-year later in the year, beginning in the third quarter, and we'll still see some negative currency headwinds in Q2.

That's my prepared remarks. I'd like to now turn the call over to Chris. He's going to comment on the Astra Tech integration and also our opportunities in emerging markets. Chris.

Christopher Clark

Thank you, Bret, and good morning everyone. I'm going to take a few moments and provide some deeper insights into our investments and activities in emerging market regions, which have really been key growth drivers for us over the past several years. I'll then also provide a brief update on the integration efforts relative to the Astra Tech, which at a high level continue to go very much in line with what we expected. With respect to emerging markets, these regions have been an area focus for us for the past several years, and continue to be central to our strategies in 2012. While the demographics of these regions, these markets are certainly attractive with the rapidly growing middle class populations.

We also believe that as a result of our strategies and investments made, our market share position has gradually improved in aggregate of these regions over time. As a group, these regions continue to be accretive to our overall growth rate. Our sales to emerging markets as a percentage of our overall global sales, excluding acquisition impact, has increased by over 400 basis points over the past five years.

As a percentage of global sales, emerging markets now represent a mid to high-teen component of our overall sales mix. Based on the demographics and the fact that we have continued to invest disproportionately in these markets, we believe these regions will continue to be accretive to our growth rate for the next decade or more.

A core strategy for us in these markets continues to be expanding our sales force footprint to reach more customers. This has been a concerted investment area for us, as our aggregate sales force in these countries has increased by over 50% over the past five years.

We now have country organizations in 25 emerging market countries, with DENTSPLY sales representation in an additional 20 countries beyond that. We are implementing plans to further expand our sales organizations in several key emerging markets by an additional 15% this year. In addition to expanding our sales force footprint, we've also expanded our investments in the areas of sales training, both in terms of selling skills and product training, and our approach in these emerging markets really allows us to heavily leverage the infrastructure and experience that exists in our franchise organizations.

Another increasingly important strategy for us in emerging markets is the development of dual branding approaches. The use of dual brands allow us to approach these markets with alternative brands compared to the premium brands we utilize in developed markets, and then we can position these brands more appropriately for the specific economic or market conditions that we face locally.

We continue to expand the use of our Sultan and Zhermack platforms in this manner ensure side consumable products. We've also recently launched several value brands in the endodontic franchise. We're now expanding these brands geographically to additional emerging market countries as registrations are completed. We view dual branding as a core long-term growth strategy for us in these markets, and are continuing to expand our internal resourcing to support these efforts.

The final strategy that has been a component of our growth in these markets has been business development activities, as we have found acquisitions to be an effective approach to gain critical mass and experienced in-market resources in specific emerging market countries. Over the last six years we've completed six transactions in emerging markets, including both manufacturers as well as sales and marketing companies.

These transactions have been core to our strategic approach in these markets, as they've expanded our presence and capabilities in several key emerging countries, and in some cases are providing platforms to expand beyond individual markets to provide for a broader reach across emerging market regions. We're pleased with the attraction each of these strategies or approaches are having in the emerging market regions, and based on the success in these markets and the strong demographics, we anticipate continuing to invest disproportionally in these regions and deriving growth rates that are continuing to be accretive to our overall growth.

I'd now like to provide some brief comments on the Astra Tech integration efforts. As Bret mentioned, we're excited to have completed the launch of our combined DENTSPLY implants organization in North America. We're pleased with the reaction to the combined business from our internal organization as well as from our customers, and feedback has been quite positive as they are quickly seeing the strength of our combined portfolio of implant solutions. The sales team is energized on this new portfolio and the new opportunities it provides our customers, including, for instance, last week's launch of the expanded Atlantis customized abutment platform to now include our U.S. ANKYLOS customers.

The integration beyond North America is also continuing to go as expected and we continue to be very pleased with the level of collaboration within our teams, the excitement within the business, and our sales force retention levels. In addition to our strategy of creating a combined dense volume implants organization, we are also moving ahead with our strategy to create a dedicated healthcare business that provides specific focus on the growth opportunities in chronic urology consumables. We anticipate announcing a new name for the global healthcare business shortly and are moving forward with the global structure necessary to provide the focus and support needed to realize the significant opportunities that we see in this business. I look forward to providing additional updates on our integration efforts during future quarterly calls.

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

William Jellison

Thanks, Chris. Good morning, everyone. Bret commented on our sales growth, but I'd like to add just a couple of additional comments regarding our sales. The 2012 first quarter geographic mix of sales without precious metal content was as follows: U.S. represented 34% of our sales, Europe was 46% this year and the rest of the world was 20% of sales. The strengthening of the dollar compared to the first quarter of last year negatively impacted our top line growth by 2 percentage points in the quarter, however, FX had only a minor negative impact on earnings per share compared to last year in the quarter, in part due to our hedging strategies. We continue to expect about a 2% to 3% headwind from current foreign exchange rates on both top and bottom line this year with the largest negative impact of approximately 4% to 5% occurring the second quarter.

As Derek mentioned, and as you can see in our earnings release, the first quarter included a number of items which impacted our results. By excluding these items from our quarterly results, we believe the adjusted figures provide a more comparable picture of the company's overall performance. 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 metals content, in the first quarter of 2012 was 59.5% compared to 57.2% for the first quarter of 2011. When compared to the same period last year, this rate was positively impacted by favorable product mix and price increases. Our product mix continued to be benefited by the strong gross margin rates of our recent acquisitions and from strong sales of endodontic and general consumable products. These positive impacts were partially offset by the effects of negative exchange rates, mostly caused by some key products that are purchased or produced in Switzerland and Japan.

Our recent acquisitions are expected to have a positive mix impact on gross profit margin rate comparisons over each of the next two quarters as they are fully reflected in the Company's results.

SG&A on an adjusted basis was $283.7 million or 42.6% of sales, ex-precious metals in the first quarter of 2012 versus 38% in the prior year's first quarter. As we have mentioned, our SG&A rates are expected to run higher for two reasons. First, our recent acquisitions have higher SG&A expenses as a percentage of sales then our base business and thus we are, as we bring those into our mix, they will increase this ratio but will be mitigated somewhat as we complete our integration efforts over the next few years. Second, although our orthodontic business sales are down substantially due to the lack of complete supply of product, we are maintaining the infrastructure of this business in anticipation of a full re-launch of these products.

This year-over-year comparison, with a higher expense level as a percentage of sales, will continue through the third quarter of this year when the acquisition impacts analyze and the orthodontic business begins to show year-over-year improvements. We do, however, expect to show some sequential improvement in SG&A as a percentage of sales in the second quarter and we also expect both a sequential and a year-over-year improvement by the time we get to the fourth quarter of this year.

Operating margins based on sales, excluding precious metals, on an adjusted basis were 16.9% in the first quarter compared to 19.3% last year in the same period. Also you should be aware that as a result of the Astra Tech acquisition, that supply has recently made some changes in our senior management assignments and as a result we have realigned our segments in this quarter. When we file the 10-Q in the next day or so, you will see that the segments have changed and that we have restated prior years to reflect the new structure as required by the accounting rules.

As Brett noted, the Japanese natural disaster negatively impacted our earnings per share this quarter by approximately $0.04 to $0.05, mostly from the loss of sales in our orthodontics business from the lack of consistent product supply. While the supply situation is improving, we expect this business will have a negative impact on results in the second quarter of 2012 of approximately $0.01 to $0.02 per share measured on a year-over-year basis.

Net interest and other expense in the first quarter on a reported basis was $13.9 million compared to $4.5 million in the first quarter last year. This increase and expense resulted primarily from higher net interest expense associated with the acquisition of Astra Tech.

Our reported tax rate for the first quarter was 20.1%, however, there are tax adjustments reflected in that rate. On an adjusted our operating tax rate for this quarter was approximately 23%. The tax rate continues to be benefited from a more favorable geographic mix. We are also benefiting from permanently reinvesting international income as we are able to more efficiently utilize those earnings. We believe that a tax rate of approximately 23% is reasonable when looking at 2012 despite the higher tax rate of our recent acquisitions.

To better understand and follow some of the following comments, you can look at the tables included in our recent press release, which reconciles performance from US Generally Accepted Accounting Principles or GAAP to adjusted non-GAAP performance.

Net income attributable to DENTSPLY International in the first quarter of 2012 on an as reported basis was $53.3 million or $0.37 per diluted share compared to $69.1 million or $0.48 per diluted share in the first quarter of 2011. As mentioned previously, these results include a number of items mostly associated with recent acquisitions which are detailed in the press release issued this morning.

On an adjusted basis, earnings excluding restructuring, acquisition related costs and other related items and tax adjustments in both periods, which constitute a non-GAAP measure, were $75.3 million or $0.53 per diluted share in the first quarter of 2012 compared to $72.1 million or $0.50 per diluted share in the first quarter of 2011. But remember that this quarter includes a negative $0.04 to $0.05 per share negative impact from our ortho and Japanese businesses.

Cash flow from operating activities from 2012 was approximately $20 million compared to $45 million in the first quarter last year. Inventories were increased in the first quarter to support the rebuilding of inventory for our orthodontic relaunch planned for mid-year and to support inventory levels during out integration activities. Cash flow was also negatively impacted by the timing of some tax payments during this year.

Capital expenditures were $19 million in the quarter with depreciation and amortization of approximately $36 million. We do expect capital spending will increase some as we move through the year to support volume increases as well as some opportunities supporting the recent acquisitions.

Inventory days were 110 as of the end of the first quarter of 2012 compared to 106 days at the end of the first quarter last year. These levels now also reflect the addition of the Astra Tech inventory. Accounts receivable days were 58 days at the end of the first quarter of 2012 compared to 60 days at the end of the first quarter last year. At the end of the quarter of 2012, we had $67 million in cash and short term investments and total debt was $1.77 billion at the end of the quarter.

In 2012 we have repurchased approximately $36 million of stock or approximately 0.9 million shares at an average price of $39.00. Based on the Company's authorization to main up to 34 million shares of treasury stock, we now have approximately 13 million shares available for repurchase. However, as we have now competed, in our recent acquisitions, our preference will be working to pay some of this new debt down before we would utilize the remaining authorization, although we will more than likely continue to offset options.

As mentioned before, recent acquisitions have increased the volatility that changes and effects rates we have on our sales and earnings as more of our sales and production is now located outside of the U.S. We are most impacted on sales by changes in Euro and our purchases and cost structure are most impacted by the Euro, Swiss Franc, Swedish Krona and Japanese Yen. We are utilizing additional systematic cash flow hedges on certain transactions to help minimize the volatility that these effects fluctuations may otherwise have on our business. At current exchange rates we expect to have a negative impact from foreign exchange rates in 2012 on both sales and EPS. Finally, as Bret stated, we are re-affirming our 2012 earnings-per-share guidance at $2.22 to $2.30 per share on an adjusted basis.

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

Question-and-Answer Session

Operator

Thank you. The Question-and-Answer session will be conducted electronically today. (Operator instructions) We'll take our first question from Glen Santangelo with Credit Suisse.

Glen Santangelo - Credit Suisse

Thanks and good morning. I just had a couple of follow-up questions from your prepared remarks. Bret, just to follow up on the ortho division, I think when the tsunami hit just a little bit over a year ago, ortho was about 9% of the revenues for the Company, if I'm not mistaking. Would you be able to give us that number today? What I'm trying to figure out is that I understand that the comps are going to start to ease in the back half of the year, but I'm trying to figure out what you are expecting in terms of revenue growth year-over-year or revenue contribution from that ortho business? Or, does the EPS impact ease just because we anniverasaried the event?

Bret Wise

Okay, well, thanks, Glen, and there are a couple ways to get at that question. First of all, Orthodontics was more than 9% of our revenue. But we have a global orthodontics business. The amount of product coming from this one supplier, in this one plant, was the 9% you're thinking of. So 9% of our global sales came from that one facility which eventually we lost supply from for an extended period of time here. I don't want to get too specific, but you should assume that our sales of those specific supplies were cut in half or something like that. As we re-launch these products mid-year, we're going to see some earnings improvements, one, because we've anniverasaried the event, so the earnings downside from last year is now the baseline, but, second of all, because we're re-launching the product line and we'll begin to grow again.

So, that's the guidance we have for you at this time. We may be able to give you more specifics going forward, but I do think that as we anniversary this and move through the rest of the year, we're committed to providing you sales with and without orthodontics for the rest of this year. So, you know at least what that impact is on internal growth, and you don't have to guess.

Glen Santangelo – Credit Suisse

Okay. Thank you. Just a quick follow-up on the implant business. If I heard you correctly, Bret, you seemed to suggest that the implant business maybe grew low-to-mid singles. It sounded like 3% to 4% this quarter. That was down maybe a percent or two from the most recent quarter. Is that a fair assessment?

Bret Wise

Yeah. We grew mid-single digits organically, or what we call internal growth of the combined business, kind of towards the low end of mid single digits. That's slightly weaker than what we had in the fourth quarter for that combined business, although markets are different in the fourth quarter than first quarter, so I'm not sure I'd pay a whole lot of attention to that.

I do think it's fair to say though because now all five of the premium implant companies have reported and based on those numbers we believe the markets probably flat to maybe slightly down or maybe slightly up, but certainly a mid single-digit number is well above the market at this point.

Glen Santangelo – Credit Suisse

Okay. That's fair. And, Bill, maybe if I could just follow-up on one comment you made. You said you expect about a 4% to 5% currency impact in 2Q. Should we assume that the Company's kind of adequately hedged so that won't have a big impact on earnings in 2Q or is that not correct?

William Jellison

No, I mean, I think if you look at our general overview on FX impacts as we've got in our broader-based presentations that we show, generally right now we look at the top line impact, whatever that may be, impacting the bottom line by anywhere from about half to that full sales level impact. So it depends on the currencies, which currencies are changing and how that's making the mix up within our sales side. While we do have some hedging activities in place, it's there to mute that impact, to help it so that it doesn't have a greater impact than it does on the sales, but it doesn't eliminate it. This last quarter it did just because of the nature of when the hedges came into play, but, in general, you should expect that those should go more in tandem.

Glen Santangelo – Credit Suisse

Okay. Thanks so much. I appreciate that.

Bret Wise

Glen, I'd add to that that Q2 is the quarter where we have the greatest headwind this year, because the Euro was much stronger in Q2 last year. The full impact of currency is reflected in our guidance for the year.

Glen Santangelo – Credit Suisse

Okay. Thanks so much.

Operator

Next we'll hear from John Kreger with William Blair.

John Kreger - William Blair

All right. Thanks very much. Just a quick follow-up on your ortho line. Are you launching your full product line at the AAO show this week?

William Jellison

No. We won't have the inventory in place and sufficient supply to do a full launch yet. We're aiming for mid year on a full relaunch. We'll, of course, be at the AAO meeting. We'll be showing product and talking to customers and so forth. We do have some supply so we're still supplying customers at some level, but the full launch won't occur until mid-year.

John Kreger - William Blair

Okay, great, thanks. And just broadly, I think you mentioned you were seeing the benefit of some price increases. Can you just update us about what those price increases have been for you and are you seeing any competitive price pressure, perhaps in Europe at this point?

William Jellison

I think in general, and we've pretty consistently stated what our pricing objectives really are, I'd say even over the last five years that we've generally tried to target something in the 1% to 2% on average. I'd say this year continues to probably be at the upper end of that range, kind of in the 1.5% to 2% range and I'd say that we've got many lines that might be well above those numbers but average across the whole product line, portfolio, the company and geographic mixes, that's more consistent.

I'd say moving forward, we'd expect that we would also be targeting for price increases of that nature and probably higher this year, especially as it relates to helping to offset some of the net tax that's going to be effecting 2013. We'll give you more updates on that as we move through this year.

John Kreger - William Blair

Thanks, Bill. Any commentary on competitive pricing changes? Do you see anything unusual there?

Bret Wise

This is Bret. Not really. We've had a really broad portfolio here so there's always pockets, this product and this region where you'll see some price pressure, a customer discounting or perhaps a customer doing bundling deals, excuse me, a competitor doing bundling deals. I would not say those dynamics are any different than we would normally see.

John Kreger - William Blair

Great, thanks. And then one last question. I know you've benefited from the new product flow last year and it sounds like this year too. Can you just talk a little bit more broadly about your R&D spending and investment strategy is? Should we think about that generally trending as a percentage of revenue so it would grow with your top line?

William Jellison

It does grow with our top line and it's been growing. We've been investing more in R&D. Generally speaking, R&D runs, and this has two components, but it runs about 4.5% of sales, 3% or so goes through the traditional R&D spend and STNA line and then there's about another point and a half external R&D that ends up getting funded through royalty streams that goes through cost of sales. So that's generally been consistent over time although we've been increasing it, particularly in the last two or three years and we've been seeing a strong return from these new product innovations we have.

John Kreger - William Blair

Great, thanks very much.

Operator

Next we'll hear from Larry Marsh with Barclays.

Larry Marsh - Barclays Capital

Thanks, Bret, Chris and Bill. Good morning. Just a couple of follow-ups. First on implants, can you remind us what percentage roughly of current sales of the combined businesses now is Europe and what percentage is the U.S.?

William Jellison

Just implants?

Bret Wise

Just implants.

William Jellison

Just implants. Yeah, of just implants I'd say that the total for Europe is probably in the 65 percentage kind of range for Europe.

Bret Wise

It's about 60%.

William Jellison

Yeah, keep in mind that Astra Tech's business was a little bit, obviously, much more balanced between the U.S. and Europe, where ours was Europe and international and very little here in the U.S. So we're still more heavily weighted to the European market, which, as Bret mentioned, is the market that was actually declining in the period. So if anything relative to some of the other players, we would actually have more of a negative mix in our implant business than some of them. So I think our performance overall was very solid in the quarter.

Larry Marsh - Barclays Capital

Right, I see. So it seems like the message is in Europe you subtract, add market to maybe slightly better in U.S. continuing to do quite well. But you said one of your first priorities as you roll out this combined business is to protect sales under Jim's leadership, and I think, Chris, you mentioned in your prepared remarks, you're pleased so far with retention of the sales force. So, I guess, when do you feel comfortable where you can breathe easier on retention? Is that another three to five months we watch for? And just how important is the show next weekend in Sweden given that it's held only once every three or four years?

Bret Wise

Okay. Thanks, Larry, there are a couple questions there. Let me just make one comment. On Europe, our implant sales in Europe is the best number we've seen out of all the competitors so far. So we were slightly down, but we've seen other competitors really down much more than we were, and we were kind of a red zero in Europe this quarter. I'm going to let Chris talk about the retention issue further.

Christopher Clark

Sure. Larry, what I base it within the retention aspect is that the integration is really an ongoing process and will be an ongoing process for many months, certainly through the end of this year. The U.S. integration obviously moved faster for a number of reasons, and we're obviously very pleased with how that went. I would say that due to the integration in other countries it's going to phase out or phase in basically between now and the end of the year, in some cases maybe even early next year.

The preparation efforts and the discussions and the collaborations I think we're very, very pleased with. I would say certainly the moods of the sales organizations at this point are very positive, because they see the power of the two portfolios coming together and the opportunities that, that creates for them, as well as for customers. But obviously one of our key assets through this is the sales force, and we're certainly going to stay close to that and make sure we do whatever we need to do to retain them as we move through the transitions. But, overall, we'll pleased.

Larry Marsh - Barclays Capital

Yeah. Thanks. I think the second question, I guess maybe a quick collaboration, and you mentioned also, Chris, on the new branding of the catheter a business, again remind us kind of how, you may have mentioned the prepared remarks growth you're seeing there, I know you've always said, 'Hey, we're excited about our management team,' you're actually separating them out to give them more fire power, so a little bit of elaboration on the branding and then how do you think that's going to translate into potential sales opportunity here in the next 6 to 12 months?

Bret Wise

Okay. Larry, this is Bret, I'm going to comment on the growth and I'm going to let Chris speak to the branding issue. That business is doing very well; we're seeing very strong growth in the U.S. although U.S. is a smaller component of that business but very, very impressive growth in the U.S. in that business. Europe is slower growth of course, I think for obvious reasons but overall we're very pleased with the performance we've seen from that business so far and more importantly perhaps the R&D pipeline we see in that business right now, and, Chris, you want to speak to the branding issue?

Christopher Clark

Yes, in terms of the branding, we cannot use the Astra Tech name moving forward after a certain point but frankly we view that as an opportunity really to create a new brand and a global brand for the health care business. I think our organization is very excited about that concept and again we're just, we're pretty close to finalizing that and being able to launch that and I think you'll see some exciting sizzle behind that as we do that and again I would just say, it just adds to the comp combined with Bret's comments in terms of kind the blatant business opportunities we see in this business.

It just kind of adds to the overall excitement we're seeing in the number of opportunities so we're pleased with it.

Larry Marsh - Barclays Capital

OK. Great, two other quick ones, one is you mentioned cash flow from ops dragged down a little bit versus last year because of extra inventory's, both with the orthodontic restocking and then a new opportunities, I guess, with implants, as you look at the actually inventory number though, is it sort of half and half impacted both by that and I guess, just remind us, it seems like historically you guys have been able to generate about 80% of your reported EBTDA comes from cash flow from operations, as a combined company now with Astra Tech is there any reason that would be much different going forward without trying to get your guide to specific cash flow number?

Bret Wise

No, I think that that's a reasonable estimate for you on the cash flow side. We would expect again another very strong year on cash flow this year. Our first quarter is typically a lower period for us in general but as I mentioned, you not only have some of the inventory sides and I think that yes you can think of those as a little bit split between those two areas but we also have some acquisitions related costs that are dragging on the cash flow here initially in this period as well, so between that and some of the tax charges we'd expect as we move into the second quarter and also through the rest of this year that we should continue to have very strong cash flows.

Larry Marsh - Barclays Capital

And final thing, your proxy came out here as of last week and I noticed that clearly management got, hit their bonus targets a little bit better because of the strong internal growth, you were able to show like 3 ½% reflected in that. It's a first time in a couple of years, I think, you've been able to do that and I know you're excited about that so I guess it's fair to say it seems like every indication, I guess for you Bret, is it your goal is to try to that and better in terms of internal growth this year. So is that a fair statement, and it seems like where you sit now you feel pretty comfortable, you're going to be able to hit those targets again this year?

Bret Wise

Well, I don't want to get into the specific targets, but I think it's fair to say at the beginning of the year we try to set stretch targets for the management team, both for internal sales growth and for net income. Last year we did pretty well against those targets and you should expect as we setup 2012 we likewise have stretch targets. I think we're off to a pretty good start here at 4.5%, but to hit our targets we have to perform very well throughout the whole year.

Larry Marsh - Barclays Capital

Okay. Very good. Thanks.

Operator

Next we'll hear from Jeff Johnson with Robert W. Baird.

Jeff Johnson - Robert W. Baird

Thank you. Good morning, guys. Brett and Chris, a couple questions for you and then maybe just a follow-up modeling question for Bill. Brett, on Europe I hear your comments on maybe staying cautious here at this point and visibility not being great, but you also came up against your toughest comp IDS. Last year was a very strong meeting for you guys and most of those benefits flowed into your Q1 last year. So how do you see the next few quarters playing out? Should we really be thinking about that falling off or is there potential that you could hold in at kind of plus 2% or so range?

Bret Wise

Thanks, Jeff. I think that there's more uncertainty and more difficulty projecting how Europe's going to develop this year than any other region in the world. We read the newspapers, we see some pretty dire projections. We haven't seen those affect dimple, though, to that large degree that it's affecting some other industries. I think people have to continue to get their dentistry done, and that seems to be holding true.

Also, I think that the market is vibricating. The north is still growing for sure and the south is certainly contracting or in recession, so there are almost two Europes we have to deal with now throughout. I think that we're comfortable in saying now, though, that what we said at the beginning of the year, that we believe the European dental market in total will be positive this year, will grow to some degree. If that's true, we think we can grow above market.

It's just a little bit difficult to be very specific. Now, the point that you raised is a good one. And that is Q1 last year was very strong in Europe. We did have a tough comp. It was an IDS year. So I think that 2.2% growth we put down in the first quarter is a pretty strong performance.

Jeff Johnson - Robert W. Baird

All right. Thanks. Then, Chris, just your comments on emerging markets was very helpful on the revenue side there. I'd be interested, though, what that translates to for current EBIT margins and you think those EBIT margins progress. Do you need to be adding significantly more infrastructure over the near and longer term given the duel branding strategies and those kinds of things?

Christopher Clark

Yeah, Jeff. Obviously we're happy with the growth there, but we're also happy with the profitability. I think I would say they're certainly profitable in terms of our businesses in emerging markets, but they are also slightly dilutive on a fully loaded cost basis versus our businesses in developed countries. That's largely due to the pricing of those countries, obviously, due to some of the underlying economic market conditions in those countries.

That said, we also carry lower SG&A as most of our R&D and certainly a good deal of our global marketing support is in developed rather than emerging markets. So, I would say, again, it's something that our profitability continues to improve. It's something that on a variable cost basis, as we get more volume in through our plants that are buying large in developed markets, as a result of emerging market growth, that also significantly improves that profitability moving forward. So, again, it's profitable. A little bit dilutive today, but we're continuing to make progress on it.

Jeff Johnson - Robert W. Baird

All right. Great. Then, Bill left two questions for you. Just, on the operating margins side, sequentially the traction was left this quarter, which is a good sign. But if you break out Astra Tech, if you break out orthodontics, could you give us any kind of apples to apples what operating margins for the company would have done, ex those issues?

Number two, on the gating of EPS, sounds like the orthodontic headwind will come down by about $0.03 or so this quarter, but the FX impact to bottom-line probably going to be $0.02 or $0.03 higher as well. So I'm assuming Q2 should look similar to Q1 as far as year-over-year changes on EPS, and then the rest of the growth comes from the back half?

William Jellison

Just a couple of comments on that, Jeff. First off, as we talked about before, we aren't breaking down any of the different components of the business just so that we aren't identifying different profitability levels of different areas. So, as we move forward, you're looking at kind of the overall broader-based business, and that's how we're generally talking about it.

As far as the second quarter is concerned, you're right in the fact that the ortho side is going to be a little bit less with that period. As I mentioned, it's only probably a $0.01 to $0.02 drag within that quarter, instead of the $0.04 to $0.05. So, that will be nice to see, and hopefully as we get into the back of the year then see some sequential and year-over-year improvements on that.

On the FX side, I'd say that your FX bottom-line impact is probably a little bit too high of a negative impact. It's probably more in the range of maybe a penny or two, but it's hopefully not more than that, unless FX rates are really a lot worse. I'd say that our bottom-line in the quarter is probably going to be a little bit less of an impact on the top-line, but generally they're relatively close to each other.

Jeff Johnson - Robert W. Baird

All right. Thanks guys.

Bret Wise

Thank you.

Operator

Next we'll hear from Jonathan Block with SunTrust.

Jonathan Block - SunTrust

Thanks guys, and good morning.

Bret Wise

Good morning.

Jonathan Block - SunTrust

Maybe just a follow-up on the orthodontics business. It seems like the impact in the quarter was largely as expected, and also for the guide for Q2, but can you speak a little bit about the back half of the year and do you still expect ortho to sort of be net neutral for full year 2012?

Then, just from an execution standpoint, when you look at your supplier, do you feel like most of the risk, the execution risk, is now behind you and it's just sort of a question of how the inventory ramps back up going forward? Thanks.

Christopher Clark

OK. Well just to answer the first part of that question, on the overall impact at this point, we still are expecting that ortho is going to be more neutral for the year. Maybe just a slight positive, but probably not much. I'd say that that's still a big hurdle for us to overcome in the back half of the year. We're going to be down four to five in the first Q, down another one to two in the second quarter.

So, we do have to see some nice improvements. As we talked about, as well, that's a multi-year kind of recovery in that business. But as far as how that goes, maybe Bret can comment a little bit more on that.

Bret Wise

Yeah, Jonathan, on the supplier, they've made just heroic progress here. I mean, from losing their plant entirely to starting a new facility, etc., and really they've done a fabulous job and they're improving sequentially. You know, we do have good weeks and bad weeks, but, overall, if you track the line that there's a pretty steady improvement.

We do think we're going to be able to re-launch this mid-year, and we think that it will continue to grow. Of course, we don't need quite the capacity we had before the crisis today, because we're not going to have all those customers back immediately. But we do think we'll have sufficient supply to do the launch mid-year. I think it's also fair to say that we're taking nothing for granted, right. We're following the situation very closely. We've got contingency plans, etc. But at this point, at least, the prospects look good for us in the back half of the year.

Jonathan Block - SunTrust

Okay. Great. And then considering the U.S. market it was another really strong quarter and I think ex-ortho, you gave another 7 plus number on the growth rate. Can you speak a little bit just to the dynamics on the U.S. market, I mean, was it very similar to the December quarter. Can you call in any difference in discretionary spend coming back a little bit? Anything that you can call out in the change of the dynamics that Q-over-Q.

Bret Wise

Well, the only dynamics, I mean, the growth rates were almost identical, right. It was 7.5 in the fourth quarter and 7.4 in the first quarter. So, it's essentially identical. The one dynamic that did change a little bit was our lab business picked up and grew really quite strongly in the first quarter. And although it did grow in the U.S. in the fourth quarter as well, it was stronger in the first quarter. So that's a good, I think, indicator for the heavier dentistry, the more expensive dentistry, because that's what those products go into.

Jonathan Block - SunTrust

Okay. The last one is just a housekeeping item. Just on the restructuring charge. Can you just detail, is that from the Ortho business or can you give us some detail around that?

Bret Wise

No, I mean, the restructuring end, you'll probably see a little bit as we move through this year. But you'll see different restructuring pieces as it ties in mostly to our integration related activities and we aren't expecting large amounts. But I think that over the next few quarters you may see a million or two in each of the different quarters.

Christopher Clark

This is a consequence of combining locations, etcetera.

Bret Wise

Right.

Jonathan Block - SunTrust

Understood. Thanks guys.

Bret Wise

Okay.

Operator

Next we'll hear from Steve Beuchaw with Morgan Stanley.

Steve Beuchaw - Morgan Stanley

Hi, thanks, good morning.

Christopher Clark

Hey, good morning.

Steve Beuchaw - Morgan Stanley

One housekeeping question. Sorry if I missed this, but Bill, could you give us the number of selling days in the quarter and how that compared to last year.

William Jellison

The selling days were exactly the same year-over-year.

Steve Beuchaw - Morgan Stanley

Okay. Thanks. And then on the U.S. consumables trend inter-quarter, and this really applies to the lab comments you guys were making, is it fair to say that U.S. strength that you've seen over the last two quarters is holding up and you would say that the U.S. is in a sustainable recovery? I mean, not looking for any chronic quantification here. I guess another way to ask the question is, do think there's been any evidence in the U.S. that people are looking to do some catch-up or are we on new trend?

Bret Wise

Well, coming out of recession we usually do see pent up demand in dentistry. A lot of dentistry can be deferred, so as people get their jobs back we usually trend up above the economy for some period of time as we get that dentistry that's been deferred through the pipeline. I think when you look at our performance, the mid-sevens, that's way above market and it's probably, I mean, I don't think that's the long-term trend rate growth for the market.

As far as the market itself goes, we'll know a lot more when we see the distributors' report. The data points we have now are three or four manufacturers that have reported and the results right now are pretty inconsistent among those four. I think when we see the two distributors' report in the next few weeks we'll know about the actual growth rate of the market right now.

This is a market that shouldn't vary a lot from period to period, so I would expect, unless there's some dramatic change of events in the world that we'll see, we should see, the recovery here kind of continue and remain reasonably around what we've seen for the last few quarters. We're talking about the future, here, so it's yet to be seen. There's lots of uncertainty and risks, but I don't see great variances moving forward from here.

Steve Beuchaw - Morgan Stanley

And following up on your comments on the distribution channel. Have you guys seen any variability quarter-to-quarter in the levels of inventory in the distribution channel?

Bret Wise

Well, we do see levels change, but that's mostly tied to our price increases. When we do a price increase, we see the level of inventory go up in the channel and we usually see it come out in the next channel. Absent that, and this can be company specific, too, because they could be running promotions or whatever, but absent that we haven't seen a lot of variance in our numbers.

Christopher Clark

Just to further comment on that, I think that we generally try to state during these calls, as well, if there's any significant movement in the dealer-inventory channels in the periods. Last quarter we actually said that despite the 3.9%, - last quarter meaning 2011's fourth quarter, we said about 3.9% and we said actually there was some dealer pullout during that period. I'd said generally our inventory levels with dealers are at very good levels at this stage during the first quarter. We didn't really see much movement at all in that, so we think the numbers that we recorded are pretty much corresponding to even an adjusted number there.

Steve Beuchaw - Morgan Stanley

Okay. Great. Thanks everyone.

Operator

Next we'll hear from Robert Jones with Goldman Sachs.

Riddell Walker - Goldman Sachs

Good morning. This is Riddell Walker in for Bob Jones today. I just had a quick question about the implant business. Can you talk about any market share shifts that you guys have seen within the market between your new integrated business and some of the more established players? Thanks.

Christopher Clark

Riddell, that's a really tough question to answer because we think we're obviously gaining market share, but who you're taking market share from varies by customer, by dentist. It's hard to talk about trends other than just looking at internal growth for the five companies and seeing who's trending up or who's trending down versus the average. At this point, I think we continue to take market share in that market although it's difficult for me to say who exactly it is coming from.

Riddell Walker - Goldman Sachs

OK, great, thank you.

Bret Wise

Thank you.

Operator

Next we'll hear from Yi-Dan Wang from Deutsche Bank.

Yi-Dan Want - Deutsche Bank

Thank you very much. I have a few questions. First of all, on your implant business, certainly great out-performance, you might say. Can you give us a sense of how sustainable this is? This has been going on for quite some time, obviously, very impressive, so if you could comment on that.

And, then, secondly, also on implants, can you give us a sense of your growth in price and volume terms. I just want to understand how well you guys are able to hold your prices. The third question is on the subject of inter-oral scanners. How important do you think this technology is to DENTSPLY, maybe not immediately, but over the next three to five years and where DENTSPLY is with this technology. Thank you.

Bret Wise

Starting out with the implant market share gains, as you mentioned, that's been going on for some time, both Astra Tech and DENTSPLY have a pretty well established, well researched, lots of clinical data on our systems. In DENTSPLY’s case we got two systems, we've got 25 years of data on one and I think 12 years or 10 years on the other, and Astra Tech has about 25 years of clinical data on theirs. So these are proven systems. I think that marketing is responsible.

As you mentioned, we have been taking share. It's hard to say how sustainable it is, I hope it's sustainable and I don't see any evidence that it's not at this point. Number two on growth and is it price driven or volume driven I'd say price is largely neutral. I'm gonna ask Chris if he has anything else on that, but from my perspective it would be primarily volume. Is there any?

Christopher Clark

Were getting a bit of price. I would say the growth we're seeing is probably a little bit more volume than price but it certainly includes price as well.

Bret Wise

A little positive price?

Christopher Clark

Yes, correct.

Bret Wise

OK, and in oral scanners, I think it is important to dentistry. The scanner itself will eventually become a bit of a commodity. What's important is what you do with the digital data that comes out of the scanner, whether you have an open system or a closed system. It is an important technology for the global dental market, I think you should expect a dense ply will be involved in some fashion.

Yi-Dan Want - Deutsche Bank

Thanks very much.

Bret Wise

Okay. Thank you.

Operator

Next we'll hear from Brandon Couillard from Jeffries.

Brandon Couillard - Jeffries

Hi, good morning.

Bret Wise

Good morning.

Christopher Clark

Good morning.

William Jellison

Goof morning.

Brandon Couillard - Jeffries

Bill, a bit surprised to see this year we purchased activity here in the quarter. Do you have a goal in terms of the net leverage ratio you'd like to be at by the end of the year or do you have more flexibility under those credits agreements. And then were there any other acquisitions in that M&A figure in the quarter outside of Astra Tech?

William Jellison

From our perspective, from a repurchase, we've stated before that if we did repurchase at this point over the next few years, it would primarily be just tied into off setting option levels. Our target level was pretty much right in the range that we actually ended up doing. From an overall leverage perspective for the end of the year, I mean, we still expect to generate a lot of cash, obviously, this year and our main focus is absolutely on repaying debt. But I think that as select acquisition opportunities come along, too, especially small- or mid-sized tuck ins, that we'd at least be willing to take a look at those.

But we do expect to make some improvement on our leverage ratios as we move through this year and I think that as you look at the acquisition breakdown, yeah, the majority of that was Astra Tech. There was a little bit out there for some smaller acquisitions, but most of it was Astra Tech related.

Bret Wise

Yes. We haven't completed any acquisitions since the Astra Tech acquisition, at this point.

William Jellison

Correct. No additional ones then.

Brandon Couillard - Jeffries

Okay. That's helpful. Should we expect the inventory to continue to build until after the second quarter, once you formally re-launch the ortho line and then wind down sort of from there into 2013? Is that how we should thinking about the working capital side?

William Jellison

No. I'd probably say that our expectation is that our inventory levels are at pretty good levels at this point. We'd expect some improvement, hopefully, already in the second quarter of this year. The third quarter, generally, it doesn't improve, and if anything it may actually even creep up a little bit. Generally our second quarter and our fourth quarter are periods that we bring down, especially in the fourth quarter. We would hope to over the next one to two quarters bring down some inventory off of current levels.

Brandon Couillard - Jeffries

Thanks. The last one is for either Bret or Chris. It seems like a number of competitors seem to be stepping up their presence in the customized implant abutment arena. What's your view of the competitive landscape there and the outlook? If I could get maybe just a comment on your sense of the low-end generic implant market environment and whether there have been any changes that you could speak to in the last several months.

Christopher Clark

Yeah, Brandon. It's Chris. Glad to take that one. First from a customized abutment standpoint, we're really happy. Obviously, it is an attractive market. Certainly, Atlantis has kind of created that market and certainly captures a very strong share and, I think, with that captures a fair amount of attention from other folks. I would say we're very pleased with the competitiveness of the Atlantis offering, and certainly the ability to bring our portfolios together, the combined sales organization to help push that through.

Certainly there's competition, but I would say the total package, in terms of what we can offer at this stage of the game, we're pretty happy in terms of how that differentiates. I would say the same thing relative to economy implants. The fact is, there's a lot more to it than just the manufacturing of an implant, and certainly the clinical support that all three of our product lines have, I think, is a pretty strong differentiator relative to those types of competitors. So we view differentiation as pretty critical, but we also are pretty pleased in terms of what we have at this point in time to differentiate with.

Brandon Couillard - Jeffries

Great. Thank you.

Bret Wise

Thank you.

Operator

Next we'll take a follow-up from Larry Marsh.

Larry Marsh - Barclays Capital

Oh, thanks. Just a quick one for Bill. You mentioned a new structure and the restatement in the Q, I mean, can you as sense a magnitude, how big of a restatement that's going to be?

William Jellison

No that's only related to the segment so its just a mix of the segment makeup themselves because different managers are responsible for different portions of the business.

Larry Marsh - Barclays Capital

Just reallocation of the business is right. That's right. You had talked about that.

William Jellison

Yeah, we'll still have four segments. It's just that they'll be shown slightly differently than they were before and as soon as you get the Q if you've got any questions on any of those feel free to give me a call.

Larry Marsh - Barclays Capital

And are you going to give us a restatement on that going backwards?

William Jellison

Yeah, for any period that we show those segments at, any comparable period, will also be shown in that same format.

Larry Marsh - Barclays Capital

Yeah, okay. Very good. Thanks.

Operator

We'll take a follow-up from Jeff Johnson.

Jeff Johnson - Robert W. Baird

Thanks. Hey, Bill, just one last modeling question here on the equity and the affiliate’s line much lower than we thought this quarter. One, is that DIO bond reevaluation. Two, I think you exclude DIO bond reevaluation then from the $0.52 EPS number. And, three, just any updates on the Korean dental implant market which seems to be influx right now just how you're thinking about DIO going forward.

William Jellison

Yeah that's correct, Jeff. And there's a line item. That's one of the adjustment line items to get to our non-GAAP numbers, as well. There's about $4.7 million at net that we took a negative hit for within this quarter in the income statement and that is only to reflect our portion of their negative impact from marking up the convertible bond on their side. That's solely related to the increase in the stock price of their stock. As their stock price goes up, that makes our convertible bond, in essence, more expensive to them, but obviously more favorable to us.

So while we take a negative impact there, there's a much larger and an offsetting positive that we're running through, but we run that through our OCI. It doesn't go directly through our P&L until the point in time that we convert. If we select to convert that bond in the future, if there's an amount out there that previously had gone through OCI, that would also then run through our P&L. If we had converted, let's say in this period, we'd have had about a $23 million positive net income impact in this period, which we would have also identified then as obviously an non-GAAP adjustment.

So anytime that that stock price goes up we're going to take a negative hit on our P&L until the point in time that we convert if we do convert that. Again, anytime you see that in our income statement where we haven't converted, there's a much larger amount in the opposite direction that we're also putting into our equity.

Jeff Johnson

Okay. Yeah, the Korean dental implant market?

Christopher Clark

Yeah, Jeff, it's Chris. I mean I would say overall relative to the comment to DIO. We're really happy in terms of their growth platform. We're seeing solid growth. We believe they're taking market share. Certainly their growth, if we were to consolidate, would be a accretive to our overall growth rate. We see a strong management team there.

And, again, if relative back to the emerging market comments, this is a platform that is doing a pretty solid job in expanding into some other emerging market countries. So, overall, we're pretty pleased with what we see there.

Operator

At this time there are no further questions. I'll turn things back over to you, Mr. Leckow, for any additional or closing remarks.

Derek Leckow

Well, thank you, Vicky. Thanks, everyone. Good questions. So, if there’s any follow- up questions, please contact investor relations. That concludes our conference call today. Thank you for your interest in DENTSPLY. Goodbye.

Operator

And that does conclude today's teleconference. Thank you all for joining.

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