DENTSPLY International Management Discusses Q1 2013 Results – Earnings …

Question-and-Answer Session

Operator

[Operator Instructions] And we take our first question from Glen Santangelo with Credit Suisse.

Glen J. Santangelo – Crédit Suisse AG, Research Division

Just a couple of quick questions if I could. Essentially, Bret, if I heard you correctly, it kind of sounds like maybe Europe took one step backwards this quarter. And I thought that inconsistent with what we’ve heard from other vendors. I’m just sort of curious if you have any sort of anecdotal data points or anything that would put that in a little bit more perspective? Is it just macroeconomic or is there something else that we should be thinking about now that we’re also almost into mid-May, I mean what have you seen, thus far, in the second quarter, anything worth calling out?

Bret W. Wise

Thanks, Glen. Certainly, Northern Europe differs from country to country but it was slightly weaker this quarter. If I had to talk about specific countries, I’d say France, in particular, seemed to be weaker. Germany seemed to be about the same and, of course, several other countries. But generally, just a slightly weaker Northern Europe. And it wasn’t as strong as it had been to allow it to offset weakness in the southern part of Europe. In our guidance — or the adjustments to our guidance that we made today, we’re reflecting that we’re not — we don’t see indications that that will turn around as we move through the back half of the year here, although we’re encouraged by some recent reports about manufacturing in Germany, for instance, that seem to be rather strong in April. I think it’s hard to translate that into the dental market without some specific data points. But from a very high level, Europe just seemed to be a little bit weaker than we had experienced last year.

Glen J. Santangelo – Crédit Suisse AG, Research Division

And maybe if I could just follow up on that, related to margins, you said in the press release that, obviously, the slower revenue growth may have impacted margins to some extent. But you also called out, specifically, some important investments made by the company during the quarter which maybe depressed margins a little bit. And I’m not sure if you were referring to what we talked about with respect to Germany and the implant business or if there were some other investments. And I’m trying to get a sense of those investments were kind of onetime or are they going to be ongoing within the cost structure? Any additional details?

Bret W. Wise

Sure. The investments we were referring to, the primary one was the integration in Germany that Jim discussed in more detail. That certainly is a onetime event, and we believe we got that behind us now. It’s important to get that done but it did depress our margins somewhat in the quarter. The other investment was the International Dental Show in March. We’ve made commitments for those expenses far in advance. We kept those commitments. We had a great show at IDS, but we weren’t able to — even though we brought SG&A down by 50 basis points, with lower growth and with the IDS expenses, the fact those expenses were in the plan for the quarter, constrained us a little bit about — towards bringing expenses down further. So those are the 2 primary items.

Operator

For our next question, we’ll move to Jeff Johnson at Robert Baird.

Jeffrey D. Johnson – Robert W. Baird & Co. Incorporated, Research Division

Bret, wondered if I could just focus on the dental implant business for a second. First, I don’t think I heard a U.S. number, if you didn’t give it maybe even just some qualitative comments around U.S. And then in Germany, hearing, especially the January and February impact of taking the sales force out for a few weeks there, wondering if you could maybe talk about March, April, May trends there just — it sounds like it’s bounced back. But the other thing we’re hearing in Germany is that the dental implant market itself may have slowed. You had the #2 player there in Germany introduced kind of a lower-priced prepackaged system here recently. Just wondering kind of how you think of the German dental implant market here over the next few quarters?

Bret W. Wise

Okay. I’ll try to do that and, Jim, if you have any further insights, you can add them. Our results x Germany were positive for the quarter even though we had 2 less selling days. We view that as a, certainly, compared to the announcements we’ve seen from other people, we view that as a pretty strong performance. We did take the hit in Germany by taking the reps out of the field early in the quarter. We saw that reflected in our sales per selling day, particularly, over the first 2 months of the quarter where there was some recovery late in the quarter of that, and I’m not sure about April, I haven’t seen the April numbers yet. But as far as we can tell, this looks like a company-specific event early in the quarter and, to us, doesn’t really provide evidence that the market there, in total, has changed in any way. Jim, do you have anything that you would add to that?

James G. Mosch

Yes. Jeff, from a standpoint of Germany, I would say that we don’t feel that there was an underlying softness in the market. There was a lot of noise. Obviously, for us, there was some particular noise regarding the integration. But in addition to that, I think the 2 less selling days and the fact that there was an additional week of Easter versus the prior year in Q1, it just created some noise in the market that didn’t lead us to believe that there was anything other than that and the overall market was okay. You also asked a question about Camlog’s introduction. And obviously, this is a — this was a pretty big announcement for them at IDS. And from our perspective, we look at this as somewhat of an effort on their part. It’s a fairly standard implant system with some fairly standard but limited applications. As you probably know, cam log is generally priced a little bit below the premium players in the German market, but not at the level of the value players. So from our perspective, and I can’t say that we totally understand their strategy, but we believe that this is an effort on their part to retain some of their customers that may be reaching into the value segment and also, obviously, maybe participate in the value segment on some level as well. I think long-term, average sell price stability, I think, could be a challenge, but we don’t see this as a direct impact to the premium market in Germany.

Jeffrey D. Johnson – Robert W. Baird & Co. Incorporated, Research Division

Okay. That’s helpful, Jim. And Bret, not to push you here, but I don’t know if you’re being evasive or just not giving us the U.S. number and that’s fine, but qualitatively, anything on U.S. specifically? And is it fair to kind of quantify the impact of pulling these guys out in Germany for the few weeks that, maybe $0.02 to $0.03, that’s kind of backing into the model, what I’m seeing anyway?

Bret W. Wise

Sorry, Jeff, I forgot that you had asked about the regional assessment. Actually Jim, you probably — you have those numbers. You’re closer to those numbers than I am, why don’t you [indiscernible]?

James G. Mosch

Yes, Jeff. One of the things I — what’s interesting about that, we feel that in the U.S. that we grew at or above the market in North America. One of the interesting dynamics for us was that, as I mentioned early on, we went live May 1 last year. And obviously, just from that standpoint, we had some activities leading up to that, that kind of clouded the picture in Q1. So it’s kind of difficult for us to make a true year-on-year comparison from that perspective. But I would say, overall, we are very pleased with our growth in North America.

Operator

And we’ll move next to Robert Jones with Goldman Sachs.

Robert P. Jones – Goldman Sachs Group Inc., Research Division

Just looking at the U.S. internal growth, I was wondering if you could share what the impact actually was in the quarter from the med tech tax? I was just wondering — I know you had commented on this before, but just wondering, were you actually able to fully pass that on to customers in the quarter?

Christopher T. Clark

Yes. Rob, it’s Chris Clark. Well, we took a price increase in January that included a number of factors, including tax and other items. And when we passed that through, I think, at this point, we do believe that the bulk of that is peaking, consistent with what we’ve seen in the past.

Robert P. Jones – Goldman Sachs Group Inc., Research Division

Okay, that’s fair. And then I know you mentioned an acquisition in the quarter. I was just wondering if you’d be willing to give any more specifics around what area that acquisition was in. And then it sounds like you are currently evaluating other deals. Maybe even just broadly, being respectful of the competitive landscape, maybe just broadly what product categories you’re most interested in? And I guess, in particular, high tech has continued to perform fairly well within dental. Just curious, Bret, if maybe any comments or thoughts about moving further up the value chain within the dental offering?

Bret W. Wise

Okay. First of all, the small acquisition we did in the quarter was a small sales and marketing organization outside the U.S. It’s really immaterial. As far as the categories we’re looking at, I don’t like to get into a lot of specifics there, but certainly, we’re looking at acquisitions in the specialty categories, in the consumable categories. Those are probably the highest focus at this point. With respect to high tech, as you know, we’re a consumable company and we’re very focused on being able to participate in high tech in the consumable categories meaning, ultimately, our products are what end up in the patient’s mouth. And there’s a lot of buzz about digital dentistry right now. Digital dentistry is a facilitator for products that end up in the patient’s mouth. But ultimately, we see our products as part of that facilitation, not necessarily being the high tech item itself but being what is facilitated to get the dentistry done.

Robert P. Jones – Goldman Sachs Group Inc., Research Division

Got it. And then I — just quickly, the last one I had, and maybe I missed this. I didn’t hear an update on the ortho relaunch. Just wondering, any comments around how you’re feeling about the market share regain there?

Christopher T. Clark

Yes. We’re very much on track relative to our expectations. I think, we’ve commented I think on the last call that we thought we’d recover about 1/3 of the lost market share and I think that we also commented that from thereon out, it’s going to be a little bit of a tougher fight, if you will. That said, I think we’re very pleased with the progress we had in the first quarter. We’ve just had the AAO show, which is the largest orthodontic show in the year this past week in Philadelphia. And I would say that we were very pleased with the results from that show as well as the customer sentiment regarding our product line. So we’re very happy.

Operator

For our next question, we go to the Steve Beuchaw with Morgan Stanley.

Steve Beuchaw – Morgan Stanley, Research Division

Just a question on the outlook for the balance of the year. It’s easy to understand how there were a number of puts and takes in the quarter that made the quarter a little atypical. I wonder if you could use that context to help us think about the drivers of the earnings acceleration over the balance of the year, given the magnitude, something like — not 1,000 basis points but quite a bit of EPS growth acceleration over the balance of the year. How do you think about — or how you’re telling us to think about the organic growth profile? Are we back to north of 3% on a consistent basis? And do we see SG&A trend back to, I guess, where The Street had been looking for them? Is that a really simplistic way to think about the model that you would think is appropriate?

Bret W. Wise

Well, I think a couple of things. One, our growth in the first quarter here was 1.6% organic with 2 less selling days. So it’s hard to adjust that for the selling days, but certainly it would’ve been reasonably higher without the 2 less selling days. As we look at our markets around the world, we see the U.S., it seems to be doing fine and consistent with last year. Europe’s a little weaker, but some of the issues that we had in the first quarter, including an adverse mix, the implant integration, et cetera, are things that we can overcome going forward on a — we can likely overcome going forward, but we don’t think we can make up for the impact that we had in the first quarter. So I think that’s the way we think about it. The plans we had for the year, we think, are intact. We can’t quite make up for what happened in the first quarter. We are going to have a little bit more headwind from slower markets in Europe as we move for the year, and we’re very focused on expense leverage, as we’ve commented in our comments today, although I don’t want to quantify that at this point. Chris, you got anything to add to that?

Christopher T. Clark

No, I think those are the primary drivers. Agree.

Steve Beuchaw – Morgan Stanley, Research Division

That’s very helpful. And then one more specific question on the implant markets. There’s been some disruption in the Japanese market with commentary in the media. It seems like that is starting to reverse. And would you agree with that characterization that the noise is starting to fade? And does that set us up for a better trend over the balance of the year, maybe a rebound over there?

Bret W. Wise

Yes. You’re absolutely right. I mean, obviously, last year was very difficult and that impact probably led through most of the year. I think we saw — I would say we saw a stabilization in the first quarter. There has been some efforts, industry efforts, with the Japanese Dental Association and others to try and quell some of those issues. And we’re hopeful that that will improve things. Do we — would we predict a rebound at this point in time? I don’t think I would be that strong quite yet. I think we need to see, probably, another quarter of activity before we have a better understanding of what’s going on in Japan.

Operator

And for our next question, we’ll move to John Kreger with William Blair.

John Kreger – William Blair & Company L.L.C., Research Division

Just a quick follow-up on Japan. I think you mentioned that that was the last major market where you need to integrate the implant business. Do you expect Japan, therefore, to be soft in the second quarter similar to what you saw in Germany this quarter?

Bret W. Wise

No, I don’t. I think the Japanese integration is not as complex from the standpoint of what we did in Germany. Germany was a very complex integration because that was the former kind of world headquarters for Friadent. So it’s a larger organization, we have a lot of moving parts there. Japan, I think also, obviously, it’s at the end, so we’ve got a lot of internal knowledge regarding that integration. And we expect this should go as others. And I think we’re well prepared for that. We don’t really anticipate any disruption there.

John Kreger – William Blair & Company L.L.C., Research Division

Great. And then Chris, in terms of the guidance, can you just clarify, are you assuming that Europe is kind of stable from Q1 levels for the rest of the year or deteriorates further?

Christopher T. Clark

Yes. We’re basically saying what we’re seeing in Europe — that systemic to Europe would continue through the rest of the year. Obviously, the determinate implant integration we’re viewing as a first quarter onetime factor, that is now behind us.

John Kreger – William Blair & Company L.L.C., Research Division

Excellent. And then one last one. I think in the past, your annual price increases have been in the 1% to 2% range. Can — with the med tech tax, following up on Bob’s question, can we assume in the U.S., therefore, it was more like 3% to 4% or maybe a bit lower than that?

Christopher T. Clark

Yes. I would characterize our global price increase — I think we made this comment on the last call as well that typically, globally, we’re probably in the 1.5% to 2% range. And I think on the first quarter call, we made the comment that we’re going to be north of 2%. I’ll probably stick with that comment, John. Obviously, if you look at it geographically, we’d be a little bit higher in the United States relative to x U.S. more than likely.

Operator

We’ll move now for Jon Block with Stifel.

Jonathan D. Block – Stifel, Nicolaus & Co., Inc., Research Division

Maybe the first question, Bret, just some high level thoughts on the endodontic business. I know you don’t really give specific commentary there, but how did that perform? And then I think it was at Chicago Midwinter when Cybron introduced a new reciprocating file, can you talk to — I knew that your sales guys are giving you there, that’s having at least a revenue impact in the field?

Bret W. Wise

Okay. Jonathan, I’m going to start the response here and then pass it to Jim. The endodontic business is performing very well. We had some key innovations that came out about 1.5 years ago that’s very popular in market and growing rapidly. We also introduced some new file system at Chicago and at the IDS, which has gotten rave responses from customers. With respect to the competitive — the response from the competitor, I’m going to let Jim address that as well as anything else he has to add to what I’ve said here.

James G. Mosch

Yes. As far as — from the standpoint of the overall market, I think what you’ve seen in our endodontic business, really over the last 2 years, is really successive product launches. We made some pretty significant investments in R&D in the endodontic business really going back about 4 or 5 years ago. I would say that we’re bearing the fruits of those efforts at this point in time. Those new products have been very well received in the marketplace. And I believe, in many cases, we’ve been fortunate to really set the standard in the marketplace. As far as the new products are coming onboard, certainly, we believe that competitors will attempt to emulate those products. But endodontics is not a one-product category and new products that we’ve offered, that we’ve launched in both — really 3 different filesystems, a new — got a purchase fill-in systems, irrigation systems and also new motors in apex locators that improved the procedure as well as diagnostics. I mean, I think we’re really offering a very updated, innovative, comprehensive solution for the customers. And we believe that we’re comfortably positioned in that market versus our competitors.

Jonathan D. Block – Stifel, Nicolaus & Co., Inc., Research Division

Perfect. Great, very helpful. And then, Chris, I think this one’s for you. You guys are bringing down guidance by about $0.05. I believe you mentioned tax is lower and will be a beneficiary of about $0.01 per quarter. So if you call it sort of lowering by $0.09, is 1/2 from FX and 1/2 from ops? That was going to be the first question. And if that’s true, in terms of ops, what’s really the driver, is it — seems Europe might be a little bit weaker relative to where you guys were 3 months ago?

Christopher T. Clark

Yes, thanks. I’d probably characterize as the following: tax is obviously favorable in the range that you mentioned, basically offset by incremental FX going the other way. And then you’re looking at basically about $0.03 in terms of really kind of the first quarter miss, if you will, in terms of the operational side on — due to softer Europe but as well the German implant integration have been in that mix, and we’re carrying that forward. And then basically carrying forward a little bit additional softness — or continuing softness, if you will, for Europe. So those would kind of be the building blocks that I would use to think about it.

Jonathan D. Block – Stifel, Nicolaus & Co., Inc., Research Division

Okay. Then very last question. Bret, Europe up 0.8%, but China actually had down consumables year-over-year. So do you think the market softened but you’re still confident that you’re gaining share over in Europe?

Bret W. Wise

Yes. I think that is pretty clear we are. We’ve seen — of course, we’ve seen all the dental implant companies report. We’ve seen the largest distributor report. Our numbers are clearly above the average of those numbers and we feel pretty comfortable that the new product introductions and the innovation, such as the innovation that Jim referred to earlier, are driving above market performance for us at this point. Just a moment on the market, I mean we had been running closer to 2% growth in Europe. This quarter came in a little bit under 1%, although there’s 2 less days selling issues, which clouds the picture, but so apples-to-apples, we feel that we’re performing about like we were in Europe, although we feel like the markets have weakened just a little bit, just perhaps as we entered 2013.

Operator

We move now to Brandon Couillard with Jefferies.