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DENTSPLY International, Inc. (NASDAQ:XRAY)

Q2 FY08 Earnings Call

July 30, 2008, 08:30 AM ET

Executives

Bret W. Wise - Chairman, President and CEO

Christopher T. Clark - EVP and COO

William R. Jellison - CFO and Sr. VP

Analysts

Jon Wood - Banc of America Securities

Jeff Johnson - Robert Baird & Co.

David Veal - Morgan Stanley

Derek Leckow - Barrington Research

Larry Marsh - Lehman Brothers

Operator

Good day, everyone, and welcome to the DENTSPLY International 2008 Second 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, Chief Executive Officer and President. Please go ahead, sir.

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

Okay. Thank you, Nicky, and good morning, everyone. Thank you for joining us on our second quarter earnings call.

This is Bret Wise, Chairman and Chief Executive Officer. With us also today is; Chris Clark, Executive Vice President and Chief Operating Officer; and also Bill Jellison, Senior Vice President and Chief Financial Officer.

I would like to begin today's call with a just a few overview comments regarding our results for the second quarter. I'm going to then ask Chris Clark to provide you some insights on certain of the items of operational focus that we have. And then Bill Jellison will give you more detailed insight on the financial results. And of course filing our prepared remarks, we glad to answer any questions that you may have.

Now before we get started it's 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 uncertainties described in the company's most recent annual report on Form 10-K, our periodic reports on Form 10-Q, and our press releases, and conference call transcripts all of which should been filed with the SEC. And of course this call and it's entirety will be part of an 8-K filing that will be available on our website.

Last night we were pleased to announce very strong results for our second quarter with both sales and earnings increasing substantially. This reflects the continuation of the trends we've experienced in 2007 and early in 2008, and it is satisfying as we strive to find the most value out of our global platform and our broad consumable product portfolio.

In the second quarter our sales rose 17.2% to $595 million, and gain 17.3% excluding precious metals to $542 million. Now this sales growth again reflects our very diversified portfolio and its comprised of internal growth of 5.9%, acquisition growth to 3.1%, and translation of 8.3%. Overall, we continue to experienced strong global demand across many of our businesses and in our specialty businesses in particular.

On a geographic basis internal growth was once again strongest outside the U.S with Europe growing over 10% internally. The rest of world adding approximately 8% on an internal basis, while the U.S was softer at 1% organic growth. In Europe we continue to see the benefits of a very strong growth in most categories and in particular all three of our specialty businesses and in many of our consumable categories. We have made some key investments in this territory this year and last, and believe that we're really starting to see the benefits of those investments emerge.

Our rest of world growth was led by double-digit growth in Asia pacific, Latin America, The Middle East and Australia. And we also experienced continued above market growth in Japan. We were very happy that the global platform that we developed is that can producing these results and we view this is a strategic advantage for us in the global marketplace.

As I mentioned internal growth in U.S was approximately 1%, and we saw some softness across many of the platforms we have. Our results in U.S were influenced by two items of particular note. The first was lower sales in our anesthetic products as last year we substantially cleared a large backlog that it build up on these products following for a long period when there was a shortage in the market. This is a very high comp from the prior year created a deficit in sales this year-on-year-to-year basis.

The second item we notice that we showed a new handpiece at the California Dental Show early in the quarter. This handpiece is really unique from air powered system it has made a benefits of an electric system, but also the benefits of a air powered system including a like profile and a very small head.

And this really, only became available to ship very late in the quarter and the factor shipping now here in the third quarter. We believe that dentists may have delayed purchases anticipating this new product and likewise dealers probably work to reduced inventories of the legacy models anticipating this launch.

So excluding these two items internal growth in the U.S was in the low to mid 3% range, which is better than we've reported obviously on a GAAP basis, but still slow by our standards. We did also continue to see some weaknesses in the specialty markets in the U.S where we talk for sometime that we believe these markets are most vulnerable to slowing economic circumstances.

The exceptions for us in the U.S would have been dental implants. They grew more than 20% organically in the U.S in the quarter. And also on our orthodontic category our self-ligating getting products including innovation C and our new lingual offering, which was called LMTM lingual minor tooth movement grew quite nicely during the quarter.

I think in the U.S, the total market is growing in the low to mid single-digits probably and is consistent with what we might expect in an economy that's growing 1% or less. At this point we do know that many of our competitors have implemented midyear price increases, which maybe boosting there growth modestly even as volume slows a bit.

We are planning our price increases October 1, which is consistent with our past practice and we would expect to see some benefit from price to again they emerge in the fourth quarter.

At this point we would expect market conditions to remain where they perhaps a bit slower then historical levels in the U.S for another quarter or two. Although we do see an opportunity to increase our U.S growth rate in the second half given the company's specific issues that we have this quarter.

Our earnings for the quarter were $0.52 per share on a GAAP basis a 23.8% increase from the prior year quarter are reflecting both strong sales growth and also operating margin expansion, and on a non-GAAP basis which Bill will speak to you in more detail.

Earnings in the quarter were $0.52 in the second quarter versus $0.44 in the prior year 18.2% improvement. And also on year-to-date basis non-GAAP earnings have risen 18.3%.

So it's rewarding to see our strong operating earnings trend despite a difficult economic environment in the U.S and the again we believe this is the value of our global operating platform and it's demonstrated by 60 basis point expansion in our operating margins year-to-date absent restructurings.

Given our current strong performance and the position we are in, we've decided to reinvestment part of our first half earnings improvement and expansion of sales and marketing resources in certain markets in the back half of this year. this investment beyond what was contemplated to start a year we will require resources equal to about a penny per share in the back half. We were very encouraged to be in a position to both deliver on strong earnings growth and to also accelerate some of our investments to better position us for future years.

So at midyear, we were well-positioned to do deliver on the targets we set at beginning of 2008. Despite our belief that, it will take a few more quarters to see a meaningful improvement in the U.S dental market. We are increasing our earnings target for this year. Our original guidance as you probably know for 2008 was for earnings extra structuring and one-time tax items to be in the range of $1.83 to $1.88, by the day we are increasing this guidance to $1.86 to $1.91 per share for the full year and of course that does take into account to expanded investment in sales and marketing in the second half that I mentioned earlier.

At this time, I would like to ask Chris Clark to give you some more insight into our plans for investment over the remainder of the year, as well as comment on our new product introductions in our pipeline. 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 provide some add a color on some of the additional investments that we are making into the business to drive ongoing growth, and also provide an update on our innovation efforts.

As Bret mentioned, we are continuing to make investments in the business in order to drive growth. As part of that one area we've decided to invest in is in increased sales representation and certain specialty businesses, as well as, in certain factor growing geographic regions. Certain businesses the increase in sales representation maybe as large as 15% to 30% for that business. And we believe that adding sales reps is a very effective growth strategy for many of our businesses and we're pleased to be in a position to be able make these investments for the future.

On the innovation front we continue to focus on leveraging the impact of new products that we've introduced in the past few quarters, as well as on introducing new technologies that provide clear advantages to the dentist and the hygienist, or the dental laboratory.

In orthodontics we continue to be very pleased as Bret mentioned would customer reaction to our self-ligating line of brackets in general, and specifically to the Innovation C, our all-ceramic self-ligating bracket, as well as the Innovation LMTM, our new lingual minor tooth movement system that we've introduced just last quarter. Self-ligating bracket sales rough over 20% over prior year behind both the Innovation C and the Innovation LMTM technologies.

As Bret mentioned as well, in the second quarter we introduced the Midwest ATC, or Air Torque Control handpiece. This product combines really the best of both worlds if you will in terms of air and electric handpiece technologies by delivering the constant cutting speed of electric with really the smaller profile and lighter weight of air handpieces. And we do anticipate a boost in our handpiece sales in the second half of the year behind this new technology.

During the quarter, we also introduced the Interra In-Office Nightguard, which combines and advanced light care resin material with an impressionless technique that really lets the dentist make Custom Nightguards and splints directly in the oral cavity during a single patient visit.

Interra builds on our successful Eclipse technology platform and this has served as a -- this provides an extensive application in fabrication of various prosthetic appliances, so to extent that platform as well.

In addition, our restoratives business introduced SmartCem2 Self Adhesive Cement in the quarter. This product is a two component, dual cure high strength self adhesive, which releases fluoride a combined aesthetic shading with a self-edge adhesives, which makes it suitable for use with a wide range of permanent restorations and restorative materials.

This business also introduced Calm-it Desensitizer during the period. This product designed to treat and prevent patient hypersensitivity to both hot and cold liquids, which is a common and painful side effect for many restorative procedures. Calm-it forms a physiological seal within the dentinal tubules of the tooth, helping to form an effective barrier to prevent sensitivity, and it can be used in our wide range of procedures ranging from crowns and composites to inlays and onlays.

So in short we continue to be very pleased for the breath and the impact of our Innovation efforts and we've got a robust pipeline of new launches that we anticipate bringing to market during the third and fourth quarters of 2008.

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

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

Good morning, everyone.

Net sales for the second quarter of 2008 increased by 17.2% in total and increased by 17.3% excluding precious metals. The sales increased ex-precious metals for the quarter included a 5.9% increase from internal growth, 3.1% from acquisitions and an 8.3% increase from foreign exchange translation.

One thing I would like to point out is that this quarter the company slightly modified its methodology for computing internal growth. This change better reflects organic growth in an environment where exchange rates have moved significantly from prior periods. The impact of this change for both the quarter and on a year-to-date basis was to reduce the internal growth calculation from what it would have done under the prior method.

We chose to change the calculation now as a potentially inflated in internal growth number and we were seeking the most accurate measure. We have checked prior years and that was little or no effect. Our year-to-date increase in sales ex-precious metals is 17.3%, and includes internal growth now of 5.8% acquisition growth of 3.1% and an increase from foreign exchange translation of 8.3%.

The geographic mix of sales ex-precious metals in the second quarter of 2008 included the U.S at 37%, Europe represented 41%, and the rest of the world was 21% of sales. European and rest of the world sales increased as a percent of total sales, as our international businesses continue to grow at a rapid pace, and as the dollar continue to be weak compared to most other currencies.

The weaker U.S dollar in the second quarter compared to last year benefited sales growth but, had little impact on earnings in the period. Net purchased price variances cost by the weak dollar and higher interest expenses from our net investment hedges are once again nearly offsetting the favorable foreign exchange translation benefits on income in the period.

Gross margin as a percent of sales ex-precious metals in the second quarter were 58.2% consistent with the second quarter of 2007. Margin rates were flat with last year's second quarter were negatively impacted in the quarter compared to the same period last year due to a negative mix impact from last year's acquisitions and purchased price variances caused by weaker dollar. The negative impacts however, were offset in the quarter as we benefited from additional implant sales mix and improved operating efficiencies.

Beginning in the third quarter, the negative mix impact from acquisitions for prior year comparisons will be reflected in both current and prior year periods eliminating the impact on margin rates when comparing two prior periods.

SG&A expenses were $200.9 million or 37% of sales ex-precious metals in the second quarter of 2008 versus 37.2% in last year second quarter. SG&A expenses as a percent of sales were slightly lower in the period as we were able to better leverage expenses with the strong sales growth in the period, despite having the expense of the biennial Friadent Symposium in the quarter.

Operational margins for the quarter were 19% compared to 18.4% in the second quarter of last year. Operating margins based on sales, excluding precious metals were 20.9% compared to 20.2% last year in the same period. And on a non-GAAP basis excluding restructurings and other cost in both periods, operating margins based on sales excluding precious metals for comparative purposes were 21.1% in the second quarter of 2008 and 20.9% in 2007.

Even compared to a solid operating margin in the second quarter of 2007 we were able to improve the operating margin rate in the period as we benefited from a positive mix, despite the impact of recent acquisitions and also benefited from the lower rate of SG&A expenses.

Net interest and other expenses in the second quarter were $3.2 million compared to income of $2.1 million in the second quarter of last year. Higher net interest expense was the cause of the entire increase. The short divergence of lower U.S dollar interest rate versus increased Euro and Swiss Franc rates combined with weaker U.S dollar were the primary causes of this change.

The impact of the company's net investment hedges typically move in the opposite direction of currency moves reducing some of the volatility caused by movement and exchange rates on the company's income and equity. This increase in net interest expenses expected to be continue throughout this year with the U.S dollar weaker compared to last year, and U.S interest rates below European rates.

Additionally, the company recorded income of $1.8 million for the provisions of SFAS 157 fair value measurements. This is a new accounting standard impact in this year and we've excluded this benefit from our non-GAAP earnings this period.

The corporate tax rate in the quarter was 28.5% compared to 31.6% in the second quarter of 2007. The year-to-date operational tax rate is approximately 27.5%. This rate reduction includes the benefits of both a lowering of the German corporate tax rate, which became effective as of January 1, 2008, and the benefits of a global business and tax reorganization, which was recently completed.

We believe we will be able to keep the full year 2008 and next year rate at or below this level. Net income in the second quarter of 2008 was $78.6 million or $0.52 per diluted share compared to $65.4 million or $0.42 per diluted share in the second quarter of 2007.

Earnings excluding restructuring and other cost income tax related adjustments and the interest income from the fair value measurement adjustment, which constitute a non-GAAP measure were $79.4 million or $0.52 per diluted share in 2008 compared to $68 million or $0.44 per diluted share in the second quarter of 2007. This represents an 18.2% increase in earnings per diluted share on an adjusted non-GAAP basis, for the second quarter of 2008.

Cash flow from operating activities was $139 million in the first half of 2008 compared to $155 million in the same period last year. The cash flow in the first half of 2008 was lower than last year due to both a lower tax payment outflow in the first half last year and accounts receivable days starting out at a much lower level at the beginning of 2008 versus the beginning of 2007. Year-to-date tax outflows in 2008 were approximately $25 million higher than the first half of 2007.

Capital expenditures were $37 million in the first half of 2008 while depreciation and amortization were $23 million in the period. Inventory days were 97 at the end of the second quarter of 2008 compared to 101 days at the end of the second quarter of last year and 95 days at the end of 2007.

Inventory is typically increased in the second half with the reduction in the fourth quarter we currently expect them to improve to at least the mid-90 day range, if not little better by year end. Receivable days were 56 days at the end of the second quarter of 2008 compared to 57 days at the end of second quarter and year end of 2007.

At the end of the second quarter of 2008, we had $423 million in cash and short-term investments. Total debt was $581 million at the end of the second quarter. DENTSPLY has repurchased $100 million of stock or approximately two and half million shares at an average price of $39.58 so far in 2008. Based on the company's recently increased authorization to maintain up to 17 million shares of treasury stock, we still have approximately 2.8 million shares available for repurchase.

Finally, as Brett noted we are pleased to be able to increase our earnings guidance for the year to $1.86 to $1.91 per diluted share excluding income tax related adjustments restructuring and other costs and the benefit from the provisions of SFAS 157.

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

Question And Answer

Operator

Thank you. Today's question-and-answer session will be conducted electronically. [Operator Instructions]. And we will take our first question from Jon Wood with Banc of America Securities, I am sorry Banc of America. Please go ahead.

Jon Wood - Banc of America Securities

Thank you, good morning.

Unidentified Company Representative

Good morning.

Unidentified Company Representative

Good morning. Jon, how are you doing?

Jon Wood - Banc of America Securities

Good. Hey, Brett, let see anesthetic in handpiece of set how the dealer business do in the U.S in the first quarter?

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

In the second quarter you mean.

Jon Wood - Banc of America Securities

I am sorry, yeah second?

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

It did, I think it was probably at market and most category and may be slightly under market and some other categories. It's difficult for us to tell actually whether the dealers are reducing inventories. There has been discussion of that in the marketplace, we are not sure its true or not, but if it's true it would mean that you would expect our growth to be a little bit lower then there's and the data points it will get for that will be when the two large dealers announce their results and actually keep in mind they usually grow above market because they have been capturing market share. So we think we have some room to improve that's broad consumable category that goes through dealers particularly when we implement our price increase October 1.

Jon Wood - Banc of America Securities

Okay. And I know this is probably hard for you to tell, but has there been any change in the mix of whether general practitioners are doing meaning, could there be higher valued procedures moving from special aspect to general practitioners if general practices visits are softening a bit, can you see any affect like that in your numbers?

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

I would be really surprised if that happens because of the economics and I think that's what you are alluding too, because the amount of training and the practice risks of doing the specialties in a general practitioner environment, they don't change very quickly so for a GP to start holding back procedures he used to refer or she used to refer because the either weren't comfortable with them or had an requisite training would be inappropriate and that trend will take a long time to emerge. So frankly we don't have a very good data points on that but intuitively I would not think it would happen if it happened it wouldn't happen very fast.

Jon Wood - Banc of America Securities

Okay, great. And then Bret, can you just comment on that M&A environment I mean as the mix, the pipeline the M&A pipeline changed at all valuation changes at all just any comment should be, I would be great. Thanks?

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

Okay, fine. Well we are very active on the business development front and obviously we can't comment on really any specific targets or activity, although we did closed a small deal in July kind of a tuck under acquisition for one of our specialty businesses. I would characterized the environment assets as there lots of activity. I don't think there has been a whole lot of change in valuation perspective, sometimes a weaker market of course brings forth companies that might not otherwise be in the market. We haven't seen that in particular dynamic yet. But, I... it remains a very fragment market and robust market and one that we are bit very active in very busy in very interested in expanding through deploying capital, and to one of those things where timing is always a risk so what are the step update years we go through the year and next year.

Jon Wood - Banc of America Securities

Okay, thanks a lot. And then one last one Bill the change in the organic growth methodology to the first quarter was revised down to around five heat [ph] is that right?

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

The first quarter would have been just a little bit of below that. We actually had a better performance on internal growth if your compared apples-to-apples in each of the periods.

Jon Wood - Banc of America Securities

Okay. All right, thanks a lot.

Operator

Our next question is from Jeff Johnson with Robert Baird. Please go ahead.

Jeff Johnson - Robert Baird & Co.

Good morning, guys, nice quarter

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

Good morning, Jeff, how are you doing ?

Jeff Johnson - Robert Baird & Co.

I am doing well, thanks. So few things here Bill going back to organic growth and could you guys update your guidance for the year now with the change do we still think kind of in that 5.5% to 6.5% range is that how we should be think it about it?

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

Yeah. Jeff we... this is Brett actually, our guidance on internal growth is still 5.5% to 6.5% for the full year and I think as Bill said it were like 5.8 year-to-date under this new methodology.

Jeff Johnson - Robert Baird & Co.

Right.

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

We are still comfortable with that.

Jeff Johnson - Robert Baird & Co.

Okay, great. And Bill, could you give us a little insight just in how you changed it what the change was?

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

Sure, the primary difference in the change Jeff is that the base period included translation impacts before. So base growth translation would have been calculated in the past from the base period straight up, and then you would have also had the difference on acquisitions taken away from that, which ultimately left the base growth number, but the base growth number than in affect had translation benefits in that. So in a rapidly moving FX environment on a specially with strong international sales it begin historically with that internal growth number really was and it hurt you in negative periods and then help in the other periods. It's been a method that we used for, you know, the last, you know, few decades. but, from in this kind of environment we felt that it was necessary to make the change.

Jeff Johnson - Robert Baird & Co.

All right, fair enough, but it sounds like going forward especially if FX tailwinds or headwinds are huge in any quarter it doesn't really change the way we think about it too much?

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

Correct and the way that it's calculated here there's absolutely no impact from FX and either type of environment.

Jeff Johnson - Robert Baird & Co.

All right, great. And then if we could move over to Europe for a second another strong quarter there and frankly I think I've been underestimating maybe some of your European opportunities, but how is it staying so strong what do you think sustainability over the back half of the year, and as we get into '09 and then obviously economic headwinds have been build in specially in Germany it seems like consumer confidence has been falling pretty hard there just over the last few months, any concerns there or might may be just wrong and you think there could be an issue?

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

Well I think Jeff, this is Bret. We're executing extraordinarily well in Europe and I think we are clearly growing above market. Predicting what's going to happen to the Europe... the European economy total is very difficult for us if that were to slow a little bit, I think the dental markets would slow a little bit with it. So as we look at the dynamics of our growth, we think, we've got probably opportunities to accelerate growth in the U.S and that's an upside potential for us. And if markets slow in Europe. We think we'll execute just as well and in fact the slower markets as we are executing today. So we are not overly concern with it although with it's a reality.

Jeff Johnson - Robert Baird & Co.

And the main driver is Brett again, we're talking mainly not mainly, but comparative at this point and some your specialty businesses?

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

Well, actually what I commented on my earlier comments was its all the specialty businesses that really performing well. But, also the consumable categories the share side consumables are performing extraordinarily well.

Jeff Johnson - Robert Baird & Co.

Okay

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

Those are the categories that I think are really driving growth there.

Jeff Johnson - Robert Baird & Co.

Okay. Any update then on competitors there, how is that is it kind of ramp up?

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

It's ramping up fine, I mean it's a different business model for us. It's... it is growing rapidly you brought that up it part of... of course it's part of the broader laboratory category, which I think one of the slower growth categories within Europe. But, we are experiencing rapid growth in that centralize manufacturing service offering to our dental labs and European environment and also in the U.S environment.

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

And I here Jeff it's Chris, I guess I'd add that we continue to expand the applications and now some part is also includes the centralized manufacturing of precious metal as well. So, that's a real big plus as well.

Jeff Johnson - Robert Baird & Co.

Okay. So, now, we are at non-precious and precious metals are?

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

Correct.

Jeff Johnson - Robert Baird & Co.

Okay.That's right, that's right, And the last question Brett I think it was in your prepared remarks when you talk about the dental implants staying north of 20%in the U.S or the orthodontics had some positive there, what's your comments on orthodontics, was that a category it was up or was any growth rates I guess you can give us on orthodontics in the U.S and outside the U.S?

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

Well, Our global orthodontics business is doing quite well, but it's stronger outside the U.S and within the U.S I would say, I characterize the ortho market has been kind of like it was in the first quarter really, I don't think it accelerated from there. And what we are seeing is that we are seeing rapid growth in the newest technologies in ortho and we mentioned some of those self-ligating, Innovation C LMTM it's a new product for us and is doing quite nice. We got some nice products offerings coming in the second quarter I said the traditional bracket is the older lines kind of the things I were as a kid are growing much lowliest people move up the value change in the market I think the orthodontic market in total has probably slowed a bit in United States this year as we kind of predicted what, but our business in total and orthodontic is kind of mid single-digits is doing fine.

Jeff Johnson - Robert Baird & Co.

Okay. And, outside the U.S even better than that?

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

: In outside U.S even better than that, right.

Jeff Johnson - Robert Baird & Co.

All right, great. Thanks, guys.

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

: Okay. Thank you.

Operator

Our next question is from David Veal with Morgan Stanley. Please go ahead.

David Veal - Morgan Stanley

: Hey, Brett, I wondered if you could help us through the pricing increase issues I mean, we've seen a broader medical products manufactures rising prices fairly aggressively due to the revising price of oil I just wondered, given what you are seeing from competitors so far this year the price increases in line up what you expected little ahead of that and then what would that mean for your October 1 price increase?

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

Well, that's a good question David, I would say the two things about price increases we think from competitors, one is we have seen them accelerate them from when they normally have been or take multiple price increases in a single period... a single year and that in the aggregate the price increases seem to be above with they have been historically. And, I don't know that this really driven by the price oils much is that is other, other inflation or other impacts on cost. But, I think it's fair to say that price increases we are looking at for the fourth quarter will probably above what that historically been.

David Veal - Morgan Stanley

Okay, and that's helpful. And, just one other question, could you talk to any particular trends that you might have seen in the quarter on a monthly basis, I guess I wonder to try to get to as to did the quarter and on a high node low node about the same?

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

I think its about the same. I'd really, we, we try not to put a whole emphasis on a month because for instance just there is one extra shipping day in a month, it's a significant it can be 5, 7% swing versus a monthly up one last shipping day we don't look at that as much as we look at shipments per day for instance in one business or another and I would say June was a pretty reflective for what we saw for the quarter.

David Veal - Morgan Stanley

Okay, that's very helpful. Thank you very much.

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

Okay.

Operator

[Operator Instructions]. And we'll take our next question from Derek Leckow with Barrington Research. Please go ahead.

Derek Leckow - Barrington Research

Thanks. Good morning and congratulation on a great quarter.

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

Thanks, Derek.

Unidentified Company Representative

Thanks, Derek.

Derek Leckow - Barrington Research

This 5.5% to 6.5% internal growth guidance does that assume that the U.S market stays around that 3% level excluding the apathetic backlog last year?

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

I would like not be that specific although we see opportunities for the U.S. for us to deal little better in the U.S. markets certainly. Certainly, we should have to do... we think better than our year-to-date growth rate. That we've seen in the U.S market because some of the company's specific issue that you commented on. So we see a little bit of upside in the U.S market and that's we see some and we are kind of bouncing add office we watch you up to make sure that it doesn't slow. So whether that's baked into 5.5% and 6.5% as a little difficult to tell but we certainly get we certainly have a number dynamics for watching very closely and in total they give comfort we can be in that range.

Derek Leckow - Barrington Research

Is this sales and marketing resource expansion involve any additional sales reps in the U.S?

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

It does.

Derek Leckow - Barrington Research

And which categories specifically?

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

Well we think our competitors are really like to now that and we like not for them no that so we are going to trying to answer that, but it's not only the U.S there is some other areas outside the U.S where we'll be adding some sales resources, but I will confirmed it some of those resources for U.S businesses.

Derek Leckow - Barrington Research

And would this be in the faster growing parts of your business or where they out of the in sort of basic consumables areas?

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

There will in both.

Derek Leckow - Barrington Research

Okay. All right, then if you look at the strong rest of the world and European growth could you characterize that growth based on sort of the newest products I mean the products launch in the last 12 months versus your existing portfolio?

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

That's really difficult to do, what I would characterize it as is that those specialty business is growing really rapidly kind of in all territories outside the U.S. There is some of our fastest growing categories and of course when you drill down within those categories I mean we have 300,000 SKU. So it's a lot of moving parts but when you drill down within those categories for instance we talk about orthodontics the newer products are growing much faster than those what we call legacy products. So I think it's reasonable for you to assume that but the level of detail you have to get into really understand a model that would be immense.

Derek Leckow - Barrington Research

Okay. And then just looking at the operating margin trends here, I mean it looks like 21.1% operating margin is a new record, do you guys anticipate that to be a sustainable number, I mean 21% or better or do you think that with these investments we might see that notch down a little bit over the back half of the year?

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

Well it's interesting, because you have to kind of look by quarter because our margins tend to be the highest in the second quarter and fourth quarter and you are right 21.1 I think is a record for us. We kind of look at that is an opportunity to take some of the first half earnings and reinvested for growth in the future, and so that's what we are doing and thus I think it would be little bit harder for us to achieve that in the second half, then what we had in the first half, excuse me, compared what we had in the second quarter although, what confirm we expect to have margin expansion for the full year kind of inline with target we have established.

Derek Leckow - Barrington Research

Okay, great. Thank you very much.

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

Okay. Thank you.

Operator

And our next question is from Larry Marsh with Lehman Brothers. Please go ahead.

Larry Marsh - Lehman Brothers

Well thanks. Good morning, Hi, Bret and hi, Bill, haven't interacted I a while really just wanted to get a couple of clarifications if I could and pardon me if you've gone through this, but Bill you are saying that of methodology of calculating internal growth gives you 5.8% year-to-date, so you are saying the first quarter be a little bit below the second quarter, is that right?

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

That's the true statement, yes.

Larry Marsh - Lehman Brothers

Okay. And then with that change are you then giving us what the calculated internal growth rates would be by region?

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

The regional growth rates we gave you today are the new ones under the new calculation.

Larry Marsh - Lehman Brothers

For the second quarter or that's those...

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

Those are for the second quarter and in the first quarter the impact would have all been on Europe and rest of world, because it had no impact on U.S growth rates just normally we had net calculation.

Larry Marsh - Lehman Brothers

I am sorry. Okay. So the, the calculated growth rates would be okay and again... you are confirming as a full year internal growth rates 5.5% to 6.6% so then in the U.S market you are saying excluding the two callouts roughly, roughly 3% which you would highlight focuses bit on specialty business you calling at orthodontics and implants is growing nicely. So do we... we let to believe then in your endodontics business is what's seeing the biggest impact there or am I misreading that?

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

No I think that the rest of the category that brought consumables category which I had answered question on earlier is a little bit slower, endo is a little bit slower.

Larry Marsh - Lehman Brothers

Sure.

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

So there are numerous categories that would fall in that area.

Larry Marsh - Lehman Brothers

Okay. And just anecdotally when again its sounds like that you are saying, you are seeing big change in behavior but you know, based on what you had anticipated is just a little bit linger of a selling cycle or just little bit more cautious of purchasing in certain categories based on the feedback you are getting from customers?

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

Well the feedback we are getting in just U.S market is that dealers are probably cautious with your inventory levels. We think that dentist, including the specialist are probably more cautious about your inventory levels. And anecdotally we think that dental visit has slowed just a little bit. So we think the market is still on pretty good shape. I mean our guess is that the markets growing maybe three points faster than GDP or four X-GDP you say which is kind of reflect what you normally see in the dental markets so we think it still a good market and is one we are going invest here in the second half so we are happy with that.

Larry Marsh - Lehman Brothers

Right, so based on your knowledge of market, you're saying that the consumer behavior is not that so far as you can tell us not any different in which you have expect in past economic slowdowns so and you haven't got any real quality even by region where you have seen any real change in behavior versus your expectations is that assessment?

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

I'll confirm that, that's correct.

Larry Marsh - Lehman Brothers

Okay. all right. And then just a follow-up I think with Jeff's earlier question about, about Europe where you continue to see robust growth, so this before and confirming that you are taking share in that market but it sounds like your basically, well, am I hear you correct in saying yes that market growth excluding your share gains is that still pretty good and, all of the market share you are tracking over Europe is that right?

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

It's yes.

Larry Marsh - Lehman Brothers

And again so it doesn't sound like you are overly cautious to think that there is going to be a big change in that growth rate. Some are the caution that you have given us six months ago in US market is that right or do you rally think that could be a slowdown in Europe?

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

Well again predicting what's going to happen economy in Europe is really... we rely on the expert from your front that actually.

Larry Marsh - Lehman Brothers

Good luck.

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

But, you know we do in Europe doesn't operate really is one community within the community we're watching very closely what's happening in the German economy, we heard the things about the Spanish economy etcetera. But, in total our businesses are really performing quite well there and we are not, blinders on, we are watching it very closely to see what emerges and we can react to it if we see changes but, at this point we don't see many changes occurring.

Larry Marsh - Lehman Brothers

Right, and it's fair to say that in some of those markets it's going to be based more on government reimbursement as suppose to big changes in your consumer behavior or is that I guess it's is very... I guess it's very market specific.

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

It very market specific. Yes.

Larry Marsh - Lehman Brothers

Okay. And finally the rest of the world and Japan again a good, good growth there. So is it unfair to say that in all other markets, new change in trend as you can tell our no in change in trend anticipated based on fed back of your guidance?

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

Yes, I mean we had a great quarter in those markets and I would say we were quite optimistic.

Larry Marsh - Lehman Brothers

Okay. All right, very good. Thank you.

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

Okay. Thank you, Larry.

Operator

And there are no further questions at this time. I would like turn the conference back over to Mr. Wise for any additional or closing remarks.

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

Well, thank you Nicky, and thank you all this morning for joining us on our call. We're confident and satisfied with the direction of the company and believe we have the right strategies in place to further capitalize on what does is a very attractive global dental market. And we are particularly pleased to be raised in earnings guidance for 2008 reflecting both the strong first half of the year for us and our expectations for the second half. We look forward to updating you on our progress as we move to the back half of 2008. Thank you.

Operator

Ladies and gentlemen that does conclude today's conference. Thank you for your participation. You may now disconnect.

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Source: DENTSPLY International, Inc. Q2 2008 Earnings Call
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