DENTSPLY SIRONA Inc. (XRAY) Q3 2007 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's DENTSPLY International third quarter 2007 earnings release conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would now like to turn the conference over to Mr. Bret Wise, Chairman, President and Chief Executive Officer. Please go ahead, sir. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Okay. Thank you, Regina, and good morning, everyone. Thank you for joining us for our third quarter earnings conference call. This is Bret Wise, Chairman and CEO. 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 would like to begin the call today with some brief overview comments regarding our performance in the third quarter and also update you on a few strategic matters. Chris Clark is then going to give you an update on our new product introductions in our pipeline. And Bill Jellison will then provide a more detailed discussion of the financial performance and the financial statements included in the release. And of course, following our formal remarks, we will be glad to answer any questions that you may have. Before we get started, it is important to note that this conference call may include forward-looking statements involving risks and uncertainties, and 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, our subsequent 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 website either later this week or early next week. So by now, each of you should have received our third quarter earnings release announcement that was released to the market after the market closed last night. If for some reason you haven't received that, it is available on our website. We're pleased to report record sales and earnings for the third quarter. Reported sales for the quarter were $488.1 million, which is a 12.0% increase compared to the 2006 quarter. Excluding precious metal content, sales were $445.3 million, which is a 12.8% increase compared to the 2006 quarter. The increase in sales ex-precious metal of 12.8% was comprised of internal organic growth of 6.0%, acquisitions added 2.9%, and foreign exchange added 3.9%. Our internal growth rate for the third quarter was led by all three of our specialty businesses which grew double-digit. Implant, once again, led the way with worldwide internal growth rate of approximately 20%. And during the third quarter we also saw continued improvement in our prosthetics or lab business particularly in the United States, building on the momentum that we had experienced in the second quarter of this year. The geographic breakdown of the internal growth in the quarter excluding precious metals was the U.S. was 3.2%, Europe was 7.2%, and the rest of the world category was 10.4%. Overall we're very pleased with what continues to be growth above that of the global dental market in most of the categories in which we compete. In the U.S., we saw a continuation of our strong growth trend in implants, building on what we had experienced really throughout this year, and orthodontics also continued with double-digit growth in the region. And of course, as I mentioned earlier, the lab business also picked up very nicely for the U.S. market. In the consumables category you will recall that late last September, September 2006, we had announced our strategic partnership with our key distributors in the United States. This partnership initiative included a significant reduction in the number of dealers in the U.S. carrying our products. To date, we remain very pleased with how the implementation has gone and although it has dampened our growth in these categories in the U.S. this year, we view it as a very important investment in the future. You may recall that at the time of the announcement last year, we allowed our discontinued dealers to both buy ahead of our October 1 price increase, and also permitted them to buy 60 days of inventory in the fourth quarter of 2006. Accordingly, we would have expected them to have had inventory to carry them through the first quarter of 2007 and possibly into the second quarter of 2007. So from our perspective, of course this means that the initiative will anniversary in the fourth quarter this year, and we believe we will begin to see acceleration of growth in this consumable category in the U.S. this quarter, meaning the fourth quarter of 2007, and then extending into 2008. In Europe, we continue to experience rapid growth, with internal growth for the quarter at 7.2%, really consistent with the very strong performance we've turned in over the entire year. Overall, we had a very strong performance in the quarter of all three of our specialty areas including implants, orthodontics and endodontics. In the rest of the world category we continue to see high demand levels for our products in most regions and experienced double-digit growth in Asia-Pacific, Latin America, Canada, the Middle East, Australia, and mid single-digit growth in Japan. One of our key initiatives is to fully leverage the investments that we've made and the resulting strength of our global platform. We've seen results accelerate in many markets as our businesses fully leverage that platform. And in addition, we're experiencing very good results in developing markets despite having implemented stronger processes earlier this year to reduce the risk that our products could be gray marketed back into the developed markets, particularly the United States and Europe. From an earnings perspective, we generated $0.42 per diluted share in the quarter, which was up 35% on a pure GAAP reporting basis. On a non-GAAP reporting basis, which excludes tax adjustments and the restructuring and other costs lined in the income statement, we generated $0.39 per diluted share in the third quarter, compared to $0.33 last year on that same non-GAAP basis, or an 18.7% improvement year-over-year. On this same non-GAAP basis, operating margins were 19.6% in the third quarter of this year, which is virtually the same as last year. I view this positively as the recent acquisitions probably negatively impacted the overall operating margin by 20 to 30 basis points in the third quarter. We should improve on that as we integrate the acquisitions and begin to realize the sales and marketing, and of course, the cost synergies coming forth from those acquisitions. And as promised, throughout this year, we would expect to begin to see some improvement in operating margin in the fourth quarter of this year, and extending into 2008. Before covering the outlook I would like to comment just a moment on our business development activities this year. To date in 2007, we have completed five acquisitions, three in the second quarter and two this quarter. Most of these transactions were for small companies. However, they're still very meaningful to us as they provide us with cost and product synergies, new technology platforms, or sales and marketing reach which will improve our ability to fully serve the global dental market. The Sultan acquisition, of course, was a larger transaction and was completed in the third quarter. We are working very closely with the Sultan management team to maximize the market reach for Sultan and finding ways that we can improve both organizations. To date, we're very early in that process, but we have found that the transaction has very solid upside potential. In total this year, we have deployed approximately $100 million in capital for all five acquisitions and we're encouraged by the additional opportunities we see in the marketplace. You may recall that our strategy is to grow above market organically and to add three to four points of growth per year in acquisitions to achieve double-digit overall growth over the long term. And given our experience this year and a view towards the pipeline, we view that as a reasonable expectation moving forward. Looking at the remainder of this year, the outlook remains very positive for reaching our full-year objectives. You may recall that at the end of the second quarter, we raised our internal growth target range to 6% to 7% from this year, and that was up from our earlier guidance of 5% to 6%. And we also commented at that time that we expected sales towards the lower end of that range in the third quarter and the upper end in the fourth quarter. The third quarter came in very close to what our expectations were, and we can reaffirm our expectations for the full year at 6% to 7% organic growth, and we would expect to be towards the upper end of that range in the fourth quarter. Likewise, we came in a little stronger on the earnings side than we had expected in the third quarter, and are increasing our full-year earnings per share guidance to $1.62 to $1.66 per diluted share, and that's up from our earlier guidance of $1.60 to $1.64 per diluted share. And again, that is on the non-GAAP basis, excluding tax adjustments and the restructuring and other cost line item. So this reflects earnings per share growth excluding these items in the mid to high teens for the full year. And consistent with our practice, we will provide you with guidance on 2008 when we announce our full-year results for 2007, which will likely be scheduled in early February of next year. So that concludes my comments. And I would like to now turn the call over to Chris Clark for a review of our new product pipeline. Chris? Christopher T. Clark†ñ Chief Operating Officer, Executive Vice President: Thank you, Bret, and good morning, everyone. Thank you for joining us on our call this morning. I would like to take a few moments and provide you an update of our innovation efforts and to highlight some of the recent key new product introductions. In short, we continue to be active on the innovation front and introduced five new products during the third quarter, which brings our total for the year to 26. I would like to highlight in particular a few of our recent introductions. First, at the recent American Dental Association Show last month, our endodontic business launched the GT Series X Files using the new breakthrough M-Wire technology. Now, this product incorporates intellectual property that we acquired as part of the Sportswire acquisition last quarter. And its nickel titanium rotary endodontic file that has greater resistance to cyclical fatigue and more flexibility really than traditional nickel titanium files. This unique file design improves the cutting efficiency and it simplifies the procedure for dentists. It has received a very positive reaction from the opinion leader network, and really is the next generation of nickel titanium rotary endodontic instruments. I would also like to highlight two recent new products on the consumable side of the business. Lasting Touch is a photo curable resin-based material that is used to seal and polish a composite restoration. This is really the first liquid, first real liquid polisher that provides faster and easier polishing techniques for the dentist and also delivers a glossy final restoration. We also introduced Aquasil B4, which is an adjunct to our very successful Aquasil line of impression materials. B4 is a wetting agent that the dentist uses before taking the impression that minimizes voids and bubbles and yields an even more accurate impression. This product is particularly helpful in difficult clinical cases, and provides the dentist greater comfort that their impression is accurate regardless of the complexity of the case. Customer reaction to both Lasting Touch and B4 have been extremely positive, as well. Looking ahead, we have several significant new product introductions in the pipeline, including new products for two of our businesses that arises from our relationship with Materialize Dental, and overall, we continue to be very encouraged by the progress of our innovation effort. I would now like to turn the call over to Bill Jellison, our Chief Financial Officer, to review the financial results for the quarter in more detail. Bill? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: Good morning, everyone. As Bret mentioned, net sales for the third quarter of 2007 increased by 12% in total, and increased by 12.8% excluding precious metals. The sales increase ex-precious metals for the quarter included a 6% increase from internal growth, 2.9% from acquisitions, and a 3.9% increase from foreign exchange translation. The geographic mix of sales ex-precious metals in the third quarter of 2007 included the U.S. at 43.4%, Europe and CIS represented 35.3% this year, and the rest of the world was 21.2% of sales. The stronger Euro this year compared to last year, not only benefited sales growth, but also had a slight positive impact on earnings. Gross margins as a percent of sales ex-precious metals in the third quarter were 56.8% compared to 57.7% in the third quarter of 2006. Margin rates were impacted in the quarter by lower margins in recently completed acquisitions, and from negative purchase price variances occurring from the weakness in the dollar. These exchange rate purchase price variances for DENTSPLY typically move in the opposite direction from earnings translation movements, and it is also why we are typically impacted more on the top line than we are on the bottom line from exchange movement. SG&A expenses were $165.7 million in the third quarter, and increased 11.6% versus prior year, reflecting the negative impact of a weak dollar and expenses associated with recent acquisitions. Expenses as a percent of sales improved in the period, representing 37.2% of sales ex-precious metals in the third quarter of 2007, versus 37.6% in last year's third quarter. We expect this leverage improvement to continue in the fourth quarter as we continue to benefit from our improving sales. Operating margins for the quarter were 16.9% compared to 18% in the third quarter of last year, and operating margins based on sales excluding precious metals were 18.5% compared to 19.9% last year in the same period. On a non-GAAP basis, excluding restructurings and other costs, operating margins based on sales excluding precious metals for comparative purposes were 19.6% in both the third quarter of 2007 and 2006. As we look forward, we expect operating margins based on sales excluding precious metals, excluding restructuring and other costs, to be flat to slightly favorable for the full year when compared to 2006, including the impact from acquisitions, which depressed the ratio slightly. Net interest and other expense in the third quarter was $0.7 million, which is an increase in expense of $0.7 million, compared to last year's third quarter. Net interest expense increased by $1.1 million in the quarter, and other expenses decreased by $0.4 million. The increase in interest expense is associated with the recently completed acquisitions and stock buybacks to date. The corporate tax rate in the quarter was 19.7% compared to 37% in the third quarter of 2006. The year-to-date operational tax rate, excluding restructuring and other costs, as well as tax-related adjustments, is 30.4%. A favorable tax-related adjustment of $7.8 million occurred in the third quarter. This adjustment resulted primarily from the deferred tax impact of a German tax rate change which becomes effective January 1st, 2008. This change reduces Germany's overall corporate tax rate to roughly 30% from approximately 39% currently. We are also expecting a future operational tax benefit beginning in 2008, from both this change and a global business project which is currently underway. Net income in the third quarter of 2007 was $65.7 million, or $0.42 per diluted share, compared to $49.4 million, or $0.31 per diluted share in the third quarter of 2006. Earnings excluding restructuring and other costs and income tax-related adjustments, which constitute a non-GAAP measure, were $61 million or $0.39 per share in 2007, compared to $52.2 million or $0.33 per diluted share in the third quarter of 2006. This represents an 18.7% increase in earnings per diluted share on an adjusted non-GAAP basis for the third quarter of 2007. Acquisitions, including Sultan Healthcare, added nearly 3% to growth in the third quarter, and were neutral to earnings for the third quarter. We expect these acquisitions to also be neutral to earnings in the fourth quarter and slightly accretive in 2008. Cash flow from operating activities was $102 million in the third quarter of 2007 compared to $67 million in the same period last year. This represents an increase of 52% compared to last year's third quarter. Year-to-date operating cash flow is $257 million, or 61% higher than the $159 million in the same period last year. The first quarter of 2006, however, included $23 million of cash outflow for the tax payment associated with the repatriation of foreign earnings made in the fourth quarter of 2005. Adjusting for this cash outflow in 2006, operating cash flow would still have increased by 41% year-to-date. Capital expenditures were $38 million year-to-date, with depreciation and amortization of $37 million in the period. Inventory days were 106 at the end of the third quarter of 2007, compared to 98 days at the end of the third quarter last year, and 96 days at the end of 2006. Inventory was built to increase stock of implant and orthodontic products to meet the increasing demand. Also approximately four days of the related, four days relate to the impact of the weakening dollar. We currently expect inventory levels though to improve to 95 to 100 days by year-end. Receivable days were 60 days at the end of the third quarter in 2007 compared to 61 days at the end of the third quarter of 2006. At the end of the third quarter of 2007, we had $260 million in cash and short-term investments. Total debt was $503 million at the end of the third quarter. DENTSPLY has repurchased 2.5 million shares for $88 million at an average price of $35.49 so far in 2007. Based on the Company's current authorization to maintain up to $14 million, or 14 million shares of treasury stock, we still have approximately 2.5 million shares available for repurchase. Finally, as Bret noted, we are increasing our full-year earnings guidance to $1.62 to $1.66 per diluted share excluding income tax-related adjustments and restructuring and other costs. That concludes our prepared remarks. Thanks for your support, and we'd be glad to answer any questions you may have at this time. Question and Answer

[Operator Instructions] Our first question will come from Jon Wood with Banc of America Securities. Brandon Coolyerd ñ Banc of America Securities: This is Brandon Coolyerd in for Jon. Any economic-related impact to your specialty business, is that something that worries you? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Well, Brandon, good morning, and that's a good question. And there has been a lot of dialogue about this recently, particularly as it relates to the implant market. I think if you look at dentistry, it is not immune to economic conditions, although it is somewhat resistant to economic conditions. And so for most of our products, they might move slightly with the economy, but not a lot. In the very specialized area, meaning the highly esthetic products, or perhaps implants, which has been the focus of a lot of discussion recently in this area, those are expensive procedures. Many times they're not reimbursed, so they come out of your discretionary income. And I would think that they would be somewhat subject to economic swings, or more subject than perhaps our consumable category. We haven't seen a big impact so far from the dialogue about the potential for a recession in the United States, for instance, on our implant business. And in fact, our implant business in the United States is growing rapidly. But again, we're probably not the best proxy to measure that because we have a small implant business here with a lot of sales and marketing resources, so we would expect it to grow above market. So I think there is an element of that, but I don't think it is an overriding consideration, particularly for a business like ours that is very diverse with respect to product categories, and very diverse with respect to geographic regions. So we typically, when we see one product or one category under perform or one region under perform, we generally have another region than outperforms and counteracts it. Brandon Coolyerd ñ Banc of America Securities: Great. Thanks. And did you take a price increase at the beginning of October? And what proportion of the products in the portfolio were raised? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: We do, do price increases throughout the year, but we have kind of a concentration of products where we raise prices October 1. Most notably, all of the consumable categories in the United States that go through distribution. We raise those prices October 1 annually, and we just last year got all the businesses to October 1, so that we can have a consistent trend year-over-year. So yes, we do, do price increases, and October 1 was the most important date. Brandon Coolyerd ñ Banc of America Securities: Great. Thanks.

Thank you our next question will come from Steven Postal with Lehman Brothers. Steven Postal ñ Lehman Brothers: Thanks and good morning.

Good morning Steven Postal ñ Lehman Brothers: Can you go through the, I apologize if you already mentioned this, can you go through the dollar amount impact from the inventory step-up, and intangible amortization from Sultan? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: We didn't break down the exact amount of it. Actually, it was much less than what we were originally kind of expecting on it and that's why we said our impact on the Sultan acquisition in the aggregate was really neutral to earnings in the third quarter. Steven Postal ñ Lehman Brothers: Okay. And then I think you mentioned the, I think Bret; maybe you said it was a 30 basis points margin impact? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Yes, the comment I had made earlier, Steven, was that the impact on our overall operating margin in the third quarter was, from acquisitions, was a negative 20 to 30 basis points. Steven Postal ñ Lehman Brothers: Okay. And then a question on your U.S. trends, it sounds to me like you believe you're still being impacted by some of the changes you made last year in the distribution program. Can you maybe elaborate in terms of what may be going on there? Is the gray market impacting that organic growth number? And can you just clarify where you are anticipating growth in the U.S. business in the short term? Christopher T. Clark†ñ Chief Operating Officer, Executive Vice President: Yes, Steven, it is Chris. I will take that one. In short, given the fact that we discontinued dealers, over 200 dealers, we knew we were going to have a headwind really for a good chunk of really most of the first year that we introduced. We're coming up on that anniversary, obviously, and we continue to believe that we're making significant progress in terms of converting customers to our retained distributor network. At this point, we've maintained the majority of the at-risk customers, and we're working real closely with the continuing dealers in really a level of partnership that we never had with them before. In terms of gray market, that we commented on that in particular in previous calls, and that continues to be a key issue and a key focus area for us. We're continuing to put a lot of resources against that. And I think we're making really some progress with that. The focus really on our end includes not only pricing, but also packaging, labeling and branding solutions. As well, we're working very closely to monitor particular international dealers that we have concerns about. And I mentioned on the call last quarter, three international distributors we discontinued in the second quarter. This quarter as well, we discontinued additional dealers that had been set up really to supply Israel, Tunisia, Algeria and Morocco, that in fact, we were concerned were engaging in gray market activities far beyond those countries. So again, that is one that we continue to put resources on. It continues to be something where we're focused on. But I think we're making some progress against it. Steven Postal ñ Lehman Brothers: Okay. Thanks a lot.

Next youíll hear from Jeff Johnson. Jeff Johnson ñ Robert W. Baird & Co., Inc.: Good morning guys can you hear me okay? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Yes good morning Jeff. Jeff Johnson ñ Robert W. Baird & Co., Inc.: Good morning. Just wondered if you could update us, Bret, maybe on the training level or the cross-training level, if you will, of the orthodontic and implant, endodontic, Iím sorry and implant guys? I think we were close to 70% as of your analyst meeting. Is that still moving up? And is that, was dental implant growth this quarter in the U.S. again approaching that 20% or north of that 20% number we saw in the Q2? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Sure, I will give you an update on that. And for those that aren't completely familiar with this, at the beginning of this year, we merged our implant and endodontics sales forces in the U.S. to bring forth to the market kind of a value package that allowed us to serve what we call the full life cycle of the tooth out of one sales bag, endodontically treating a tooth or doing an implant when it is required. It encompassed a significant training effort and investment of funds to bring the endodontic sales force up to the level of training necessary to do implant sales, and likewise, to bring the implant sales force up to the level of training necessary to do endodontic sales, which is rotary endodontics, it is kind of like surgery. That progress has gone very well. As you mentioned, in mid September we were at 70% proficiency. It has ticked up a bit since then. And we're getting to the point where we need some very specific training for some specific folks, but not nearly the broad-based training that we had to encompass this year. So I think it has gone very well. Implant growth in the U.S. was over 20% in the quarter again, which we view as favorable given some of the benchmarks we get from other implant companies in this market. And again, we view that initiative very positively, and on track to accomplish the objectives that we set forth about a year ago when we implemented it. Jeff Johnson ñ Robert W. Baird & Co., Inc.: Great. And then as we look into the fourth quarter, Bret, obviously a lot of moving parts with the anniversary of the distributor reorg, as you talked about. But with moving all of the price increases to October 1, and so presumably a little bit bigger maybe buy-in this year at the end of Q3 as opposed to prior years, just want to make sure I am hearing you correctly, that Q4 we should see a tick-up in organic growth in the U.S.? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Yes. And the movement of the price increases was actually last year. Last year, we moved the last large division to October 1. And we did it at the same time we implemented that strategic partnership with our key dealers in the U.S. So we had our key dealers buying ahead of that price increase last year and the discontinued dealers buying ahead of that price increase last year. And I think the message I wanted to send this morning was that it will anniversary in the fourth quarter, so in the fourth quarter last year, the discontinued dealers could only buy two months of inventory. So we should begin to see an up tick in internal growth coming from a comparison issue there, as well as our better execution on the partnership with our dealers this year. But the price increase issue was the same year-over-year this year. They were October 1 last year and they are October 1 this year. Jeff Johnson ñ Robert W. Baird & Co., Inc.: Okay. Great. My misunderstanding, thanks for the clarity. And Bill, I guess last couple of questions for you. FY08 tax rate then, you alluded to it, should we be thinking 50 basis point, 100 basis point year-over-year decline in FY08? Is that fair? Or is that going to be too big? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: We haven't given any kind of outlook on that tax rate at this point, Jeff. And I think from, we are absolutely targeting to continue to make some improvements in that area, both because of the German situation, as well as because of the global project that we're working on internally. I think we will talk more specifically on that when we really give guidance for next year. Jeff Johnson ñ Robert W. Baird & Co., Inc.: Fair enough. If I heard your comments, though, correctly, bias could be to the down side? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: I wouldn't expect that it would be higher than this year. That's a true statement. Jeff Johnson ñ Robert W. Baird & Co., Inc.: Okay. Fair enough. And again, not trying to go at FY08 guidance here, I'm trying to without going directly at it anyway, I guess. The deals you've done, five deals thus far, the corporate goals you guys talk about at 5% to 6% internal growth, 4% to 5% acquisition growth, and then EPS growth maybe a couple of points above that, have those five deals that have been done this year, are they sizable enough to kind of get you into that corporate goal range, if you will? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Well, I think the five transactions we did this year were meaningful and important to us, and as I mentioned, they grew, they contributed about 3% growth to the third quarter. So that can accelerate a little bit going forward, because at least one of those technologies, one of those acquisitions was a pure technology play. And so we would expect it to start to contribute going forward. But I think what I would emphasize is we believe we can get to those goals, but we're not done yet. We're continuing to work on this. We would expect more acquisition activity, both, perhaps this year. It is hard to nail the timing down to just a couple of months left in the year. But going into 2008, we would expect more acquisition growth, and we're encouraged by both what we see in the marketplace and our ability to execute on it. So we view that goal as a reasonable expectation at this point. Jeff Johnson ñ Robert W. Baird & Co., Inc.: All right. That's all I've got, guys. Thanks much.

Our next question will come from Anthony Ostrea with JMP Securities. Anthony Ostrea ñ JMP Securities: Hi good morning guys.

Good morning Anthony. Anthony Ostrea ñ JMP Securities: Maybe just piggybacking on the acquisition kind of pipeline question earlier, Bret, it seems like, at least for this quarter, or this conference call, you sound a little more forceful or optimistic about being able to secure, or to do much more deals than the past. Maybe can you qualify those comments, maybe give us more color on how big that pipeline is right now, maybe either in terms of the number of companies you're looking at, dollar amount, or timing perhaps? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: That's always hard to do. And I would really rather not do that. What I would say at this point is that we added resources to our business development group at the beginning of this year. And throughout this year, we've been much more focused on networking and targeting companies that we think would contribute to our growth, our global reach, our technology base, et cetera. And we've been encouraged by the number of companies that make it through that screen. Executing on transactions, of course, always requires a lot of investment in time. You got to make sure the culture of the two companies are right, and that the synergy expectations are reasonable. And I guess my message today was that now having spent 9, 10 months on this area, after having put more resources towards this area of our business, we're encouraged by what we see. So we would expect that we would continue to be acquisitive going forward. At the investor meeting in mid September in New York, we stated that our target is to reinvest about 75% of our cash flow in growth, which of course includes acquisitions as a major component of that. And so that is our target. And we think it is a reasonable expectation. Anthony Ostrea ñ JMP Securities: Okay. And then maybe, Bill, in terms of acquisitions and impact on margin, I know you said, or maybe it was Bret, it was a 20 to 30 basis point impact this quarter. When might we see, at what point, which quarter, might we see the impact of those acquisitions becoming neutral, so to speak? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: Well, first off, Anthony, the impact from the acquisitions is totally dependent upon the type of acquisition that it is, the business that it is in, and also what kind of margin levels that it is at. Keep in mind, for example, when we acquired Sultan Healthcare, which was obviously the largest acquisition that we did this year, we stated that about two-thirds of the products that they currently, that they currently sell are actually manufactured outside of Sultan. And so obviously, we would expect, and you should expect, that the margins on that business would be less than they would be on average for DENTSPLY. That does not mean that other typical acquisitions that we would be doing, may be not only at, but may be above the overall margin rates that we have for an organization. And I think on average we would expect that acquisitions, other than in the first probably quarter of when inventory step-up would occur, would typically be not only accretive for us moving forward, but should at least be at kind of the same margin rate levels that we have as an organization. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: I would expand on that, Anthony, just by saying it takes a while to get the synergies, both in terms of growing the acquired business, and finding the ways that you can share resources to make both businesses stronger. It takes a while. So we're still at the infancy of that. And as we noted in our comments earlier, we would expect operating margin expansion for the whole business to start in the fourth quarter. Anthony Ostrea ñ JMP Securities: Okay. And maybe just, Bill, you mentioned that say for Sultan, two-thirds of products are being manufactured outside of Sultan. Are there plans, I guess right now, to bring that in-house? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: This is Bret, actually. We, in the dental industry, we find in many instances that outsourcing production is actually a favorable strategy. It is a useful strategy, particularly if the equipment, the installed base of the equipments are already there. So there may be occasions where we want to in source some of that manufacturing, but I would not characterize that as a main strategic element to use when we integrate Sultan. I think their supplier base is a very good supplier base, and they've served the Company well, and we would expect that that would largely continue. Anthony Ostrea ñ JMP Securities: And two last questions. One on FX. If I heard you correctly, Bill, I think you said that in fact, the FX in the quarter on margins was minimal, I believe. Can you just clarify that, if I had that correctly? And in a, if rates actually turn against you on the top line, can you comment on the impact of FX on margins? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: Sure. The comment that I made there, Anthony, was really that FX, obviously we get full impact of FX translation on the top line. But we've typically stated in the past, as well, too, that we don't get that same level of impact on the bottom side, because we've got more natural hedges in the business as far as where we're producing products, and how that is going back and forth. So in this case, as the dollar, while the dollar is weak, we actually get favorable translation side benefiting us. But on the operating margin side, we are actually purchasing in a few additional products, especially from the European market out of our Swiss locations and German locations that actually have a negative impact as far as FX is concerned, through our purchase price variances in our gross margin areas. But right now, netting both the translation and of the impact from the PPV side of the equation off, we're still getting a slightly favorable bottom line impact from FX today. Anthony Ostrea ñ JMP Securities: Okay. And the last question, just on your specialty products, I think you broke out ortho and implants in the U.S. Can you maybe just comment on endo in the U.S.? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Sure. Endo, I would characterize as a more mature market in the U.S. compared to the implants and orthodontics. And I think, I think our comment was that in the U.S. market, both implants and orthodontics grew double-digit, and we didn't comment on endo. Anthony Ostrea ñ JMP Securities: Okay. Great. Thank you.

Your next question will come from Greg Halter with Great Lakes Review. Greg Halter ñ Great Lakes Review: Good morning guys.

Good morning Greg. Greg Halter ñ Great Lakes Review: You mentioned that there has been five acquisitions so far in 2007. I know you've talked about four of them. Can you briefly discuss the fifth one? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Sure. It was a small acquisition of an implant distribution business in Europe. So we didn't comment on it because it was a small transaction, a small company, but still important to the area, the region of Europe that we were targeting. So that was the nature of it. So I would characterize it this year is we've done four small transactions and then a larger transaction in Sultan. Greg Halter ñ Great Lakes Review: Okay. And on capital spending, do you have your thoughts there for 2007, and maybe a look into FY08, as well? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: Sure. From 2007's perspective, you can see kind of how we've run on a year-to-date basis. We're around 37, 38. I think that we'll be a little bit stronger on a run rate in the fourth quarter than we were for the first 3 months. Our expectation is that we will be somewhere in probably the, approximately the $60 million range in total for this year. Expectations kind of moving forward in the next year should be more consistent with the growth levels off of that number for our expected internal growth. Greg Halter ñ Great Lakes Review: Okay. And with your net debt, I think at only around 14% of total capitalization, and I know you've discussed the acquisition side of things, and it is always a timing issue. Can you give us your perspective on where you see the Company going relative to the share repurchase, particularly given the 2.5 million shares you still have authorized to maintain up to 14 million? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: Sure. I think, that as we mentioned before, we constantly look at the stock buyback side. We also obviously take into account things that are taking place inside of the organization, and also kind of where our acquisition pipeline is. As I mentioned, we've got about 2.5 million shares still available under our authorization level. I would expect moving forward, even with both acquisitions and the debt to cap position that we've got as an organization that you should absolutely expect that we would be repurchasing some additional shares as we continue to move forward here. Greg Halter ñ Great Lakes Review: Okay. And one last one. Do you have any target area where you think either debt to EBITDA, or debt to cap should be? William R. Jellison†ñ Chief Financial Officer, Senior Vice President: We do have, we obviously have some overall guidelines within the Company. I think from a perspective of looking at whether we would be doing buybacks along with some of our other activities on the acquisition front, I would say that if we're kind of at or below kind of that 25%-ish debt to cap level, more than likely you will see us be doing both of those activities and not restricting ourselves to one. I would say as we're north of the 25% debt to cap level, there would be additional evaluations taking a look at based on how full our pipeline of acquisitions are. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: I would elaborate on that just a bit, Greg. I think what we've said is that we want to be a strong investment grade credit. We kind of think of that as a triple B plus credit. We've also said kind of 35 to 40 debt to cap is a comfortable area for us. And we would like to keep our, some of our ratios of, leverage ratio at two or below two, if possible. We're comfortable with all of those levels, although we would also stretch for a larger acquisition if it were strategic. Greg Halter ñ Great Lakes Review: Great, thank you very much. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Okay. Thank you.

Your next question will come from Derek Leckow with Barrington Research. Derek Leckow ñ Barrington Research: Thanks good morning and congratulations on a great quarter. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Thanks, Derrick. Derek Leckow ñ Barrington Research: I just want to talk about your outlook for operating margin. Obviously, with some of the unusual spending that was going on this year to grow your sales forces and to train everybody, just wondering what part of that will be nonrecurring and can you help me understand, typically you guys have been targeting 50 basis points a year improvement. I guess we will see a bigger improvement then in 2008? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: This is Bret. You're right. We typically target 30 to 50 basis points per year improvement. We kind of started out this year by saying we were investing in certain areas to accelerate internal growth, and we're pleased that, that has been the outcome. Most of those investments, you need to understand, are in people and resources to support those businesses, so those are kind of ongoing investments. They won't go away. Although with what we said is, we think we will grow into those investments and thus, we will begin to see margin expansion late this year. We have been pretty consistent about that, and now I think we should see margin expansion in FY08, as well. So we're kind of staying with out target, 30 to 50 basis points per year. We think that is a good target for us and we can accomplish that. We haven't done that so far this year. But we've been pretty forthright that it was due to those same investments you alluded to in your question. And I think going forward; we would now expect to see margin expansion again, start to occur beginning in the fourth quarter this year, and moving on into FY08. Little, little hard for us to give you more guidance than that at this point because we're in our budget process right now. Derek Leckow ñ Barrington Research: That's helpful. I think it is important that we are going to see the rebound in Q4 in internal growth, and that helps leverage some of those costs, I guess. And then for next year, we can set the kind of gauge what the level of increase would be in SG&A spending. It sounds like it will be more constant with this year as opposed to any kind of decrease. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Yes, I don't think you will see it go down, but it may not grow as fast as it has in the past. And thus, we will get more leverage out of that line in the income statement. Derek Leckow ñ Barrington Research: Okay. Great. And my last question, on the orthodontics business. You are still growing double-digits here, even despite a seasonally weaker period. And I'm wondering is this because the self-ligating brackets are now becoming a standard of care? Or are you still seeing that as a premium technology that people trade up to? What is the status of self-ligation out in the marketplace? Christopher T. Clark†ñ Chief Operating Officer, Executive Vice President: Yes Derek, it is Chris. We continue to see the self-ligating category grow and we continue to gain market share in that category. And obviously as we have chatted previously, it is a significant premium price. Our Innovation C product, in particular, which is the all ceramic self-ligating bracket, continues to have very strong demand, and that is really one of the key drivers in terms of the business results we're seeing. Derek Leckow ñ Barrington Research: And what level of penetration would you estimate that you're currently at with that product? Christopher T. Clark†ñ Chief Operating Officer, Executive Vice President: Oh, I think we've got a long way to go yet, to be quite frank. Again, self-ligating is the minority in terms of the units in the market. And we've had a very good introduction, and we're getting not only upgrade, if you will, from traditional bracket cases, but also gaining more competitive market share. But yes, we're early in the game on this one. I think we've got, this will continue to be a growth area for us, a growth product for us as we look to 2008 and beyond. Derek Leckow ñ Barrington Research: The trade-off for the end user is a third less time in terms of treatment time, but probably 50% higher cost. Is that how I should think about that or--? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Yes, this is Bret. I think for the patient and the orthodontist, of course, you get accelerated treatment time by about a third with self-ligation. You're right about that. And we have been able to do that for some time using an all metal bracket. The real key to Innovation C is that it is a highly esthetic bracket, so the patients love it. It still gives the clinician, it doesn't sacrifice function or speed of treatment, so the clinician gets what they want, and it has had very great acceptance in the marketplace. The opinion leaders like it, the docs like it, and the patients like it. So as Chris said, we think it has a long way to run. Derek Leckow ñ Barrington Research: Okay. Thank you very much. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Thank you.

And you have a follow up question with Brandon from Banc of America Securities. Brandon Coolyerd ñ Banc of America: Thanks for taking my question. A conceptual one, I guess, on amalgam. Should we be focused on this issue as a potential driver for the Company, and do you perceive any upcoming legislative events or otherwise that may catalyze a transition from amalgam to composites in your restorative product line? Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: That's a very good question. And we've seen a slow trend of conversion of amalgam restorations to all composite restorations, really for a number of years. Occasionally, meaning every couple of years, it seems to, there seems to be something raise its head that challenges whether we should be using amalgam as an industry because of the, there is a mercury content within amalgam, but it is encapsulated in the amalgam. Nevertheless, amalgam is still a very good product. My back teeth are full of them, and they've been there for 35 years, and they're still functioning great. And we believe amalgam will be around for some time. Although this slow but constant conversion to composites should probably continue and that is an opportunity for us because our revenue generation per filling, per se, if you will, is much higher with the composite than it is with an amalgam. So I think that will aid the industry and aid us. But it is going to be a slow and consistent conversion, not a, I don't see it being a one-time event where amalgams just go away. Brandon Coolyerd ñ Banc of America: Thanks. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Thank you.

It appears we have no further questions at this time. But I would like to give the audience one additional opportunity. [Operator Instructions] And there are no further questions at this time. Mr. Wise, I would like to turn the conference back over to you for closing remarks. Bret W. Wise†ñ Chairman of the Board, President, Chief Executive Officer: Okay. Thank you, Regina. And again, thank you, everyone, for joining us today for our third quarter report. We feel really good about our performance through the first three quarters of 2007. And we also feel like we're making good progress on our long term strategic initiatives. Thank you again for your time this morning. And we look forward to updating you on our progress as we move into 2008. Thank you.

Thank you. That does conclude today's conference call. We thank you all for your participation. Have a great day.