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DENTSPLY International Inc. (NASDAQ:XRAY)

Q1 FY08 Earnings Call

May 01, 2008, 08:30 AM ET

Executives

Bret W. Wise

Analysts

Derek Leckow - Barrington Research

Anthony Ostrea - JMP Securities

Jon Wood - Banc Of America Securities

Jeff Johnson - Robert Baird

Chairman of the Board, Chief Executive Officer and President

Christopher T. Clark - EVP and COO

William R. Jellison - CFO and Sr. VP

Operator

Good day, everyone and welcome to the DENTSPLY International 2008 First Quarter Earnings Conference Call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Bret Wise, the Chairman, President and Chief Executive Officer. Please go ahead, sir.

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Again this is Bret Wise, Chairman and Chief Executive Officer and also with us today are Chris Clark, our Executive Vice President and Chief Operating Officer, and Bill Jellison, our Senior Vice President and Chief Financial Officer.

I am going to begin today's call with a few overview comments about our results for the first quarter and then I'll Chris Clark to elaborate further on the progress we've made in our Implant business and also highlight some of our new product introductions both ones that came out in Q1 and a few during the pipeline.

Bill will follow Chris' remarks with some more detailed insights on our financial results. And then of course following our formal remarks we will be pleased to answer any questions that you have.

Before we get started it is important to note that this conference call may include forward-looking statements involving risks and uncertainties. These should be considered in conjunction with the risk factors and the uncertainties described in the company's most recent annual report on form 10-K and our periodic reports on Form 10-Q, our press releases and our conference call transcripts all of which have been filed with the SEC. This conference call in its entirety will be part of an 8-K filing that will be available on our Web site subsequence of the call.

Last night we announced our first quarter results and we are pleased to report a continuation of some very strong growth trends we did experienced in 2007, most notable accelerated sales growth and record sales and earnings for the first quarter. Our overall sales growth ex precious metal content was up 17.2% in the quarter, reflecting both a very balanced product portfolio and a very broad geographic reach. You'll hear later today from Bill that our sales outside the United States now comprise 62% of our total sales, providing us with a very balanced geographic profile which lessens the impact anyone geography has on our reported results.

Overall, our reported sales for the quarter were $560.8 million, an increase of 18.6% compared to the 2007 quarter. Excluding precious metal content, again sales were $496.2 million and as I mentioned earlier, that's an increase of 17.2% for the quarter and that represents our fastest quarterly expansions since the third quarter of 2002.

A growth in the quarter ex precious metals was driven by 6.3% internal growth, 3.2 % acquisition growth to arrive at a constant currency growth of just under 10% and we had a 7.7% pick up from currency. On a worldwide basis growth was very strong in both endodontics and implants and was also aided by some acceleration in the consumable categories.

On a geographic basis, internal growth was strongest outside the U.S. with Europe growing 8.5% organically and the rest of the world growing 6.3% on an internal basis while the U.S. had a respectable 4.0% growth. In Europe the growth rate remained strong despite really some tough comps from the prior year when the International Dental Show, which we referred to the IDS was held in Cologne Germany. You'll recall this show was held every other year and was held in the third week of March last year thus it gave us a boost to our consumable sales in the first quarter last year, creating what was really a pretty difficult comp for us as we looked to the first quarter of this year, which makes the 8.5% internal growth in Europe even more remarkable.

Our rest of the world growth was lead by double-digit growth in Asia Latin America, the Middle East and Australia. On balance the organic sales growth outside the U.S. was very strong. We continue to believe we are growing share in Europe and throughout many regions of the world and in particular those that I mentioned here.

In the U.S., I would say the market conditions have progressed about as we would have anticipated given the broader economic conditions, market growth has slowed in the higher-end discretionary procedures with more normal growth rates really experienced in the consumables and to a lesser extent the lab market. On our part, we continue to see very strong growth rates in our U.S. implant business, again reflecting the strength of our sales and marketing investments there, albeit of a fairly small base. On the broader market indicators, what I refer to as the normal consumables, we believe the market has slowed slightly from the pace of late last year. As we noted in the past this broad sector of dental consumables is fairly resistant to economic pressures and as expected our sales in that category held up much better than the broader economy and better than the higher-end discretionary dental procedures.

Earnings for the quarter were $0.45 per share both on a GAAP basis and on a non-GAAP basis reflecting an 18.4% increase from the prior year quarter reflecting both the strong sales growth but also an improvement of more than 100 basis points in our operating margins.

As you know we target operating margin expansion of 30 to 50 basis points per year and we feel good about the performance this quarter and reflects of course a very strong start towards reaching our goals for this year.

Overall, we're off to a strong start in 2008 for both sales growth and earnings growth. As we entered the year we had taken some weakness in the U.S. market into account when we gave the guidance for all of 2008 that was back at the beginning of February. I think we have seen some of that weakness in the U.S. develop and it will probably take a few quarters for that to turn around. However, one of the key strengths of DENTSPLY is our diversity in both product categories and in our geographic coverage and this quarter and throughout 2008, we expect that to be a key driver in our financial results. Certainly the performance in Europe and the rest of world in Q1 clearly demonstrated that.

Our original guidance for the year when we spoke at the beginning of February, we stated an internal growth of 5.5% to 6.5% and earnings growth of... earnings of $1.83 to $1.88. We realize that given the first quarter result here there's an upward bias on this full year guidance and today we certainly feel even more comfortable about the guidance that we gave you back in February. At this point though given we only have one quarter under our belt and the continued on uncertainly about U.S. economy, we are going to confirm the guidance for the full year that we had originally set on both measures and we expect to revisit both the internal growth and earnings guidance after the conclusion of our second quarter much as we have done in past years.

Before passing the call over to Chris, I would like to comment on the meeting I attended in Berlin, Germany two weeks ago. It was the 13th Friadent Symposium. As you know Friadent is our implant company and the symposium that they held there is held every other year and is our key marketing meeting to introduce new concepts and products to our implant customers or prospective implant customers and really reflected an impressive list of key opinion leaders from around the world. The registration was targeted at 2000 customers and we closed the registration two weeks in advance of the meeting with 2300 attendees confirmed from over 60 countries is a kind of standing room only meeting and we clearly could add close to 3000 people there space permitting.

The meeting was very interesting and I believe reflected the strong demand that we've created for our implant systems and I have asked Chris to elaborate on that a bit today and talk to you about our progress with the implant business as well as some of the new products that we have.

Chris?

Christopher T. Clark - Executive Vice President and Chief Operating Officer

Thank you, Bret. Good morning, everyone. Thank you for joining us on our call this morning. I would like to take a few moments and comment on our global implant business, including key initiatives and investments in this area as well as provide an update on our overall innovation efforts for the company. We continue to gain market share globally in the dental implant market.

Total growth was almost 30% in the quarter and internal growth was over 15% globally with U.S. internal growth of approximately 20%, this despite indications of the slower implant market. This 15% internal growth figure is without the impact of currency and also without the impact of any acquisitions including distributors that we have acquired. This internal growth rate is above that of our competitors in the segment that have reported their first quarter results. And as a result, we believe our implant performance is above the market growth rate in both the U.S. and in Europe. We continue to be very pleased with the impact of the additional resources we've invested in this area.

We are particularly pleased with the recent approval of the underlying claims to extend our tissue care positioning for the ANKYLOS implant line to the U.S. This positioning has been very effective in Europe and gaining significant market share and these new claims are being very well received by both current and perspective customers. This should continue to provide a solid growth platform for our efforts to gain implant market share in the U.S. In Europe, we are expanding our sales representation on implants in several key countries and we anticipate that this will continue to drive above market growth there.

Bret mentioned the recent Friadent Symposium held two weeks ago in Berlin and we were really excited about this event. It's attracted over 23,00 employee... sorry 23,00 attendees and provided a unique platform to preview an exciting innovation ANKYLOS CX, which is scheduled to be introduced to core European markets later in the second quarter and to the U.S. by the end of 2008.

ANKYLOS CX is a new implant design that provides the unique option of either a non-indexed or an indexed [inaudible] connection in one implant body. This allows the dentist to choose the procedure according to the clinical case and according to his or her clinical preference. Reaction to the new CX implant design has been extremely positive.

In addition to the commercial investments I have mentioned, we have also invested heavily in addition implant manufacturing capacity to support our ongoing above market growth rate. We will continue to invest as appropriate to ensure that we stay ahead of our successful demand creation efforts.

Beyond the innovation efforts that I have highlighted in our implant business, new products continue to be a key focus area for us across each of our franchises. In the first quarter, for instance, our Preventive franchise introduced a new handpiece sleeve for our market leading Cavitron Ultrasonic Scaler System. This sleeve illuminates the oral cavity enhancing [inaudible] during the scaling procedure.

In addition, we introduced an updated caries detection device called Midwest Carries ID that utilizes technology that was acquired as part of the NEX [ph] deal last year. This device incorporates new design features including a new sterilization process to make it even easier for dentist to use and also a new calibration system to help ensure greater accuracy over the life of the device.

In addition, this business is scheduled to introduce a new handpiece that combines the best of both air and electric handpiece technologies, delivering the constant cutting speed of electrics with a smaller profile and lighter weight of an air-driven handpiece. First shipments of this product is scheduled for later this quarter.

In the first quarter, our orthodontic business introduced a new lingual minor tooth movement system called Innovation LMTM. The system provides the aesthetic advantages of lingual brackets, which are placed behind the teeth rather than in front and offer greater patient aesthetics versus traditional bracket systems.

And as the Innovation of LMTM addresses historical issues associated with lingual bracket systems, namely patient speech and tongue irritation, and also significantly simplifies the clinical procedures for lingualized brackets for the dentist.

Also, our European prosthetics business has extended its centralized manufacturing capabilities to now include precious metal substructures in addition to non-precious titanium and zirconium. This further expands the utility of our Compartis Centralized Manufacturing Service and also the Cercon Eye Scanner.

In short, we continue to be pleased with both the breadth and the impact of our innovation efforts. And we have a full pipeline of new lunches that we anticipate blinking to market during the year. We expect several important lunches during Q2, which should benefit us in the second half of the year.

I'd now like to turn the call over to Bill Jelson, our Chief Financial Officer to review the financial results for the quarter in more detail. Bill?

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

Thanks, Chris. Good morning, everyone. As Bret mentioned, net sales for the first quarter of 2008 increased by 18.6% in total and increased by 17.2% excluding precious metals. The sales increased ex precious metals for the quarter included a 6.3% increase from internal growth, a 3.2% increase from acquisitions and a 7.7% increase from foreign exchange translation.

The geographic mix of sales ex precious metals in the first quarter of 2008 included the U.S. at 38.2%, Europe represented 42.4% and the rest of the world was 19.4% of sales. European sales as a percent of total sales increased as Europe continued to grow faster than the U.S. throughout 2007 and continued that trend in the first quarter of 2008 benefited by strong internal growth and the strength of European currencies. We are pleased with the strong double-digit growth and above market organic growth in a period where economic conditions in the U.S. have added some uncertainty for most companies.

The stronger euro in the first quarter compared to last year benefited sales growth but had little impact on earnings in the period. Net purchase price variances caused by the weak dollar, transaction exchange rate losses and higher interest expense from our net investment hedges offset the favorable foreign exchange translation benefits on income in the period.

Gross margins for the first quarter were 57.5%. That's ex precious metals compared to 57.2% for all of last year and 58.2% in the first quarter of 2007.

Margin rates were negatively impacted in the quarter compared to the same period last year due to impacts of recent acquisitions and purchase price variances caused by the weakening dollar. While we expect these purchase price variances to continue, there is the opportunity of gross margin rate improvements as we moved through the year from the benefits of product line mix, synergies from integrating our acquisitions and our lean initiatives.

SG&A related expenses were $184 million or 37.1% of sales, ex precious metals in the first quarter of 2008 versus 38.8% in the prior year's first quarter. These expenses improved as a percentage of sales as costs were better leveraged in 2008 benefiting from the strong sales performance.

Operational margins for the quarter were 18%, compared to 17.2% in the first quarter of last year. Operating margins on sales, excluding precious metals, were 20.4% compared to 19.2% last year in the same period and this based on sales excluding precious metals for comparative purposes excluding restructurings in both periods would have been 20.4% in the first quarter of 2008 and 19.4% in 2007, a 100 basis point improvement.

Operating margin rate showed a nice improvement in the period and we remained comfortable with our target of achieving a 30 basis point to 50 basis point improvement in operating margins on average over the long term as we are well on our way to showing solid improvement again for this year.

Net interest and other expense in the first quarter was $6.1 million, compared to income of $2.2 million in this area last year in the first quarter. Net interest reflected $5.1 million of the increase expense. The sharp divergence of lower U.S. Dollar interest rates versus increased euro and Swiss franc rates combined with weaker U.S. dollar were primary causes of this change.

The impacts of the company's net investment hedges typically move in the opposite direction of currency moves, reducing some of the volatility caused by movement in exchange rates on the company's income and equity. This increase in net interest expense is expected to continue throughout this year with the U.S. dollar weaker compared to last year and the U.S. interest rates below European rates. The increase in other expenses primarily related to foreign exchange transaction losses in the period. These transaction gains or losses occurred due to balance sheet accounts measured in currencies other than the functional currency and in current periods where there is a rapid change in currency rates. Overall this loss is larger than we would have expected on a reoccurring basis and is difficult really to model or anticipate in either direction.

The corporate tax rate in the quarter decreased to approximately 28% from approximately 30% in the first quarter of 2007. This rate reduction includes the benefits of both the lowering of the German corporate tax rate, which became effective as of January 1st, 2008 and the benefits of a global business and tax reorganization, which is recently completed. We expect it to be a reasonable assumption for an operational tax rate for 2008.

Net income in the first quarter of 2008 was $68.2 million or $0.45 per diluted share compared to $58.5 million or $0.38 per diluted share in the first quarter of 2007, an 18.4% increase in earnings per diluted share.

Cash flow from operating activities in the first quarter of 2008 was approximately $30 million compared to $42 million in the same period last year. The cash flow in the first quarter of 2008 was lower than last year due to both a lower tax payment outflow in the first quarter of last year and accounts receivable days turning out at a much lower level at the beginning of 2008 versus the beginning of 2007. Capital expenditures in the period were $19 million with depreciation and amortization of $14 million in the period. Inventory days were 100 at the end of the first quarter of 2008, compared to 101 days at the end of the first quarter last year and 95 days at the end of 2007. Inventory typically increased since early in the year as we prepare for the launch of new products. However, we expect to improve to the low-to-mid 90 day range by year end. Receivable days were 57 days at the end of the first quarter in 2008, compared to 59 days at the end of the first quarter in 2007 and 51 days at the end of 2007.

We do expect improvement in accounts receivable days back to the low-to-mid 50s by year-end. At the end of the first quarter of 2008, we had $345 million in cash and short-term investments. Total debt was $587 million at the end of the first quarter. During the first quarter, we have repurchased $88 million of our stock or approximately 2.2 million shares at an average price of $39.85.

Based on the company's recently increased authorization to maintain up to 17 million shares of treasury stock. We still have approximately 30 million share... 3 million shares available for repurchase.

Finally, as Bret noted, we are very pleased with our first quarter performance and confidently reaffirm our original guidance set for the year for share in the range of $1.83 to $1.88 for 2008. This guidance excludes the impact of restructuring costs of one-time tax adjustments.

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

Question and Answer

Operator

Thank you. [Operator Instructions] We'll take our first question from Barrington Research, Derek Leckow.

Derek Leckow - Barrington Research

Thank you. Good morning and congratulations on a great quarter.

Christopher T. Clark - Executive Vice President and Chief Operating Officer

Thanks, Derek.

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

Thanks, Derek.

Derek Leckow - Barrington Research

I am having a really hard time with the guidance, however it looks like if I pull out the 2 million shares you repurchased and I lower my tax rate, I am having a hard time keeping it within that range. Can you tell me where the... where shall we be more conservative?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Well Derek, the guidance we have given is for the full year. We certainly outperformed expectations here in the first quarter, I think, both on a sales basis and on a margin basis. Certainly the interest expense issue that Bill raised is important because those hedges are doing exactly what they were designed to do and that is mute the impact of earnings... of currency on earnings. So you may want to take a look at that and then remodel the tax rates. I think that sustainable 100 basis point margin improvement might be a little bit aggressive for the full year, particularly if we continue to run this strong. We'll probably look for ways to reinvest, to accelerate growth further in the future. And thus we don't give guidance on specific points of the income statement. And in the past, as you know, even if we performed extraordinarily strong in the first quarter, we'd like to see two quarters behind us before we start adjusting our guidance. So that's about the most guidance I can give you at this point.

Derek Leckow - Barrington Research

Okay, that's helpful. Thank you, Bret. The second question is related to your visibility into your distributed consumables businesses, especially the U.S. where you have the strategic partnership program in place, my understanding is that you have real time access to that data and I'm just wondering if you could share with us what you're seeing in terms of distributor behavior right now, especially in the U.S. market?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Well, I think there's a couple of dynamics in the U.S. market in Q1, some of which we've discussed already, some of which we haven't. I would say the dynamics in Q1 for the distributor base businesses was very strong in January and February and weaker in March. No there were two less selling days in March than there were the year before, so to break-even, to not grow at all, you had grow 10% basically in March. So that's not surprising because of the change from Easter, which last year was in the second quarter and this year was in the first quarter. So the comment that they made earlier about the consumables market, I think, hold true at this point. That is that to us it looks like it slowed just a little. Now we're going to get a lot more input on that when we have the public distributors come out with their results of course, because they're probably a much better measure of the total consumables market than we would be at this point. But as best we can tell that market slowed a little bit, but not much.

Derek Leckow - Barrington Research

And so the ordering pattern seems rational to you right now?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Yes. Ordering pattern seems rational, from the distributors to us seems rational.

Derek Leckow - Barrington Research

Okay. Great. Thanks very much.

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Thanks.

Operator

Our next question will come Anthony Ostrea with JMP Securities.

Anthony Ostrea - JMP Securities

Hi, good morning, guys. Can you hear me?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Yes good morning. Very fine.

Christopher T. Clark - Executive Vice President and Chief Operating Officer

Good mooring.

Anthony Ostrea - JMP Securities

Few questions, just on your guidance or may be going back to February and now, I mean I did hear your comments on that you are reiterating guidance and you are probably a little more optimistic about what guidance is, but can you comment maybe in the change? Has there been a change in what you see in the overall dental markets and may be in the U.S. when you first gave guidance in February and what you're seeing right now?

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

No, I think we probably anticipated what was going to happen pretty well. I mean when we were back at the beginning of February on our call, questions came up about what would happen with a slowing U.S. economy and we thought the higher-end discretionary procedures would probably slow. And today what we see is from our competitors at least the public implant companies it looks like it did slow. It didn't slow as much for us in implants, but again we've over resourced that really I think hitting on a lot of cylinders given the new claims that Chris talked about. So I'm not sure we're a good measure of the overall market in implants. And in ortho that market had been very strong last year and I would say... that's about as discretionary as you get. We've seen that market slow somewhat. We think we have some opportunities may be in the second half of the year to have that accelerate again to some new products we are going to bring forward. But I would say the market has reacted about how we thought it would.

Anthony Ostrea - JMP Securities

Great. And then you mentioned ortho, can you maybe give us the ortho numbers for maybe U.S. and worldwide for the quarter?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

No, we haven't in the past and we don't intend to disclose those. But I think it's fair to say that the ortho business, and ours is primarily a U.S. business, slowed in the U.S. but not overseas.

Anthony Ostrea - JMP Securities

Okay. Same question, I guess with endo, would you be able to comment on maybe just their [inaudible] how that grew in the quarter versus last quarter?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Same issue for endo, although the worldwide rate for endo was really strong. Our business in endo and implants both grew double digits worldwide in first quarter and I would say that the performance outside the U.S. was stronger than the U.S. So we saw a little bit of slowing in that market, too. Some endo procedures are discretionary. I would say the majority are not discretionary as they involve pain. But there are some endo procedures that are deferrable when they are not involving pain. I think we saw the margins of that market slowdown a little bit, too.

Anthony Ostrea - JMP Securities

Okay. And then just lastly from me. Can you just may be update us on your integration for U.S. implant and endo sale force? Is that practically done right now?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Yes. That's pretty well done and out. Let me let Chris kind of comment on that.

Christopher T. Clark - Executive Vice President and Chief Operating Officer

Yes. Anthony, that is pretty well done. The sales organization is fully combined and trained and we continue to see... be real pleased with the progress we see with that. Certainly, the U.S. implant growth number is, in our mind, largely driven from the additional sales resources we put on this. And so again, as we look at it, we are really pleased with the implant performance and as result of that initiative.

Anthony Ostrea - JMP Securities

Great. Thank you very much.

Operator

Next we'll hear from Jon Wood with Banc Of America Securities.

Jon Wood - Banc Of America Securities

Hi, thanks. Good morning.

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Good morning.

Christopher T. Clark - Executive Vice President and Chief Operating Officer

Good morning, Jon.

Jon Wood - Banc Of America Securities

Bret, you mentioned two less selling days in March, I mean is there any empirical way to quantify what Easter did, at least in a broad sense to the internal growth rate in the quarter?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Yes. It's a little bit harder for our business. It may be easier actually for the distributors business. But I think for the full quarter I think we were one selling day shorter than the prior year. In our direct businesses, we see that right away because it's just one less day for the reps to have to take orders and try to sell products. And our direct businesses are about half of our business. And the distributor-based businesses, of course the distributor's inventory is between us and the end users. So it's not quite so easy to equate us at that. But generally speaking, I would say if we lose a day, a shipping day in the quarter that could have as much as 1 point, arguably as such as 1.5 point impact on sales. I tend to think it's towards the lower end of that range than the higher end.

Jon Wood - Banc Of America Securities

Okay. And then you talked about distributor orders in March, but can you give us a view on April, are you willing go there?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Our April sales looks pretty good. Yes, I mean we haven't closed out the month yet, I guess we have, just a day within the month. We haven't seen the month-end numbers yet this morning. But I would say the month of April looked pretty good to us.

Jon Wood - Banc Of America Securities

Okay. Great. And then has the composition of the acquisition pipeline changed at all in the last six months? Has the controversy in the dental market impacted valuation expectations at all?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

I would say not to a great extent. I think that the... there're still a lot of opportunities for acquisition in the market. We certainly want to participate in that and be a consolidator. We think there are many good companies out there that would help our company grow faster, be more profitable. And I think it's fair to say that there is a number of discussions going on. I would not say there has been a dramatic change in valuation expectations at this point.

Jon Wood - Banc Of America Securities

Okay. Great. And then one quick one for Bill. Are you willing to talk about what we should be thinking about in terms of the non-operating expense line, Bill, I think, last time we talked it was $8 million ahead of last year, but it seems like that has changed materially, given the first quarter experience. So, are you willing to comment on how much more of a headwind that will be on the non-operating expense line?

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

Actually, the non-operating expense including the interest, both interest and the FX transaction related impact that we've got, I'd say, between the two of those this period that's probably a reasonable level for you to look at over the next two, three quarters, maybe even a little bit lower than that because obviously we got hit this quarter by a transaction related impact and the transaction related movement can actually go in either direction. It's really depending on how the rates actually move within that quarter versus kind of where they are in comparison to last year. On the interest side of the equation, though, I think the interest, at least as our expectation on the interest, would be that it would probably continue at roughly the same level that it was in this quarter, at least from a projection perspective.

Jon Wood - Banc Of America Securities

Okay. In our share repurchases really accretive at this point given that the interest rate environment?

Christopher T. Clark - Executive Vice President and Chief Operating Officer

They are at the prices that we were at this point and obviously we take a look at that relative to when we buy back stock. But from our perspective we'd still believe that it's a good investment.

Jon Wood - Banc Of America Securities

All right. Thanks a lot.

Operator

[Operator Instructions] And we will take a question from Jeff Johnson with Robert Baird.

Jeff Johnson - Robert W. Baird & Co., Inc.

Good morning, guys. Can you hear me?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Hi, good morning, Jeff.

Jeff Johnson - Robert W. Baird & Co., Inc.

Nice quarter here, guys. Wondering Bill, especially if I could get a couple of clarifying comments here just on the model. Building on John's question there on the net other line, so if I'm hearing you correctly, should we be thinking may be in our model on a quarterly basis about negative $5 million or so as an expense?

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

Yes, I think it does probably in a reasonable ballpark there Jeff. Keep in mind that our interest expense, a large piece of that is coming from our net investment hedges. So, part of that's going to depend on where the currency rates move within the different periods as well as that rate differential. But, at this point in time within the first quarter of this year most of the benefits on translation where actually offset in three categories. They were offset in our gross margin area with negative PTV variances because of the different rates that we're paying and some of the different currencies even though we've got many natural hedges there. Second one was on the transaction related negative expense or loss that we had in the quarter which was a couple million dollars, roughly. And then the third point is the higher interest rate level or the higher interest expense level. And those three components typically don't completely offset movement in the FX translation side and we usually get a little bit of positive drop too. But because of the first movement on the decreasing interest rate environment in the U.S. made actually offset most of that positive benefit in the first quarter.

Jeff Johnson - Robert W. Baird & Co., Inc.

Sure. And could you remind me, you pay euro tax rate, it's receiving the U.S. float?

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

We're paying euro variable in most cases and we're actually... we're paying out in the U.S. side and we're receiving euro.

Jeff Johnson - Robert W. Baird & Co., Inc.

Okay. And just two other questions, Bill, then tax rate... I thought last quarter we were talking an operational rate of 30.4% for '07 and dropping that 100% or 150%, where is the extra hundred basis points coming from now for 2008? And then, can you at all quantify on the operating margin, the 100 basis point improvement, adjusted basis this quarter? What percentage of that maybe came from the last year's ideas versus no ideas this year so we can kind of think about going forward operating margin?

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

Sure. Let me go back in that and reclarify that interest coming, Jeff. I might have said that in reverse. We're actually receiving on the U.S. side and we're paying out on the euro side. And since the U.S. rates have actually flipped on us where U.S. rates are currently lower we're actually receiving less under that environment.

Jeff Johnson - Robert W. Baird & Co., Inc.

That make sense. That's what I thought. Thanks.

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

Yes. On the operational side of the equation, from an operating perspective we had very solid operating rate improvement in this first quarter. I think, if you look at kind of how the numbers ran in the last year. The second quarter was actually a pretty good operating margin rate in that period. So I think that you should probably expect that there's not much of an improvement over the overall operating rate within that period. But if you look towards the back half of the year, I think again we should continue this good improvement.

Jeff Johnson - Robert W. Baird & Co., Inc.

Okay. Great. And then Bret, could you... I guess clarify, you made a comment on the lab business in your prepared remarks and I couldn't tell exactly what you meant by that, whether the lab environment has softened here in the U.S. or whether you said that held in well, I just wasn't quite clear on your comments?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Yes, thanks Jeff and I'll clarify that. I think on the lab business what we saw was the consumable business looked pretty good but the equipment business slowed down. So we see labs continuing to do businesses and so forth but may be less willing to make big expenditures right now.

Jeff Johnson - Robert W. Baird & Co., Inc.

How much of that at all was I think were closed down, maybe [inaudible], do you think any of it is just purely comps at this point on the equipment side or do you think that's true economic environment driven sluggishness?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

I think it's probably both, I think it's probably both. You have a good point that we launched [inaudible] about a year and a half ago in Europe and a year-ago in U.S., so there's a small element about... I tend to think it's a balance between the two, but I would say it's more driven by labs just being less willing to make big expenditures in the current environment.

Jeff Johnson - Robert W. Baird & Co., Inc.

Okay. Great. And then just last two questions, one, you have in the past I know you don't quantify growth rates by some of your specialty segments but you have given a growth rate overall for specialty, any chance we could get that again and then just bigger picture on the implant business, obviously some reimbursement issues over in Sweden right now. Do you have much exposure there and if you do is this something by the second half when those issues probably clear up that we could see even a further up tick in your implant business by second half of the year?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Well, first... on the first part of the question, I don't think we have disclosed in total segments before. I think it's fair to say that the specialty segments in the U.S. slowed down absent implant but worldwide, we did not see that slowness. We didn't see in the Ortho, we didn't see it implant, we didn't see it in Endo. So, those businesses remain quite strong outside the U.S., which of course is the biggest piece of our business. The consumable categories, we think they... for us because of the distributor change we made last year consumable categories have improved but of course have they offset of a slightly slower markets here in the U.S. Overseas, the consumable categories were quite strong. So that's how the way I would characterize that. And the second question you had was --

Jeff Johnson - Robert W. Baird & Co., Inc.

The Swedish dental implant reimbursement changes and whether there's any impact now and whether if that gets resolved, could it be a tailwind for the second half of the year?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Our business in Sweden in implants are quite small. So, we're not really experiencing much of an impact from the change and we don't really view it as a huge upside for us either.

Jeff Johnson - Robert W. Baird & Co., Inc.

Okay. Great. That's helpful. Thanks guys. I appreciate it.

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Thanks.

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

Thank you.

Operator

[Operator Instructions] It looks like we do have a follow up from Jon Wood with Banc Of America Securities.

Jon Wood - Banc Of America Securities

Hi, thanks. So, Bret, is... do you think that in organic growth rate of over approximately 4% in the U.S. is still relevant for the year?

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

It's hard to say. In my prepared comments, I said that we don't think that will turnaround in a quarter for instance, we think that the market is what the market is and it will change overtime but not dramatically within 90 days. So, we think that the market conditions we have today are probably sustainable. We don't really see it getting worse for the next couple of quarters but we don't... we wouldn't model a substantial improvement for the next several quarters either in the U.S. So we're looking very closely at that whether there is places we could make investments to accelerate our own growth even in a tougher economic environment and that may be possible. But absent additional investment, I think the market is about where it's going to be for at least a quarter or two.

Jon Wood - Banc Of America Securities

Okay. Very good. Thanks.

Operator

Gentlemen, at this time there are no further questions. I'll turn things back over for any additional or closing remarks.

Bret W. Wise - Chairman of the Board, Chief Executive Officer and President

Okay. We thank you for joining us today. We feel we are off to a strong start for 2008. We remain very optimistic about the growth opportunities in the global dental industry and are making investments to participate in that and accelerate it. And we look forward to updating you on our progress as move throughout the year. So, good morning and thank you very much.

Operator

And that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.

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