Feb 11, 2010
DENTSPLY International Inc. (XRAY)
Executives
Bret Wise – Chairman and CEO Chris Clark – President and COO Bill Jellison – SVP and CFO
Analysts
Derek Leckow – Barrington Research Jeff Johnson – Robert W. Baird & Co.
Natalie Nadler – William Blair Larry Marsh – Barclays Capital Scott Green – Bank of America Jason Rodgers – Great Lakes Review
Operator
Good day and welcome to the DENTSPLY International 2009 fourth quarter earnings conference call. Today’s call is being recorded.
At this time I’d like to turn the call over to Mr. Bret Wise, the Chairman and Chief Executive Officer.
Please go ahead, sir.
Bret Wise
Thank you, Missy, and good morning everyone. Thank you for joining us on our fourth quarter call.
This is Bret Wise, Chairman and Chief Executive Officer, and also with us today are Chris Clark, our President and Chief Operating Officer; and Bill Jellison, our Senior Vice President and Chief Financial Officer. Each of the three of us some prepared remarks today, we are going to comment on the state of the market in late 2009 and how we see it going into 2010.
And of course, we're going to cover in some detail our fourth quarter 2009 performance as well as full year 2009 performance. And as usual following our formal remarks, we'll be pleased to answer any questions you may have.
Before we get started, it is important to note that this conference call will in fact include forward-looking statements involving risks and uncertainties, and those should be considered in conjunction with the risk factors and the uncertainties described in the company’s most recent annual report on Form 10-K and our quarterly filings on Form 10-Q as well as our press releases and other filings with the SEC. It’s important to note that the company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.
And as usual a recording this conference call in its entirety will be available on our website. Last evening we were pleased to announce fourth quarter and full year earnings.
Our 2009 performance I think illustrates DENTSPLY’s ability to deliver consistent performance throughout economic cycle. We achieved solid results in a very challenging market largely due to efforts to balance our continued investment in growth prospects, but also a rapid reduction in our non-essential discretionary expenses.
On balance, I think we did a good job of controlling cost, taking market share in select markets and improving cash flows. Our fourth quarter results show some signs of market stabilizing and also even improving in certain markets.
In total, the fourth quarter sales were up 11.3% ex precious metals and that was driven by constant currency growth of 5.7%, and a currency benefit of 5.6%. The constant currency growth of 5.7 included internal growth of a positive 0.6% and acquisition growth of 5.1%.
Looking at just the dental business excluding our non-dental businesses, the internal growth would have been 1.3%. I think it’s important to note that this is the first positive internal growth we have seen since Q3 of 2008, and although we are -- need your confident the fourth quarter we nevertheless view the positive growth as reflective or perhaps a modest improvement in select markets and summary terms of the growth.
The dental internal growth was driven by positive growth in our consumable lines and our specialty products in total, which were both positive during the quarter. The prosthetics business continues to lag and had negative internal growth in the quarter.
I think there are a couple of important messages here. One is that, consumable growth appears to be coming back the fastest in the market, and while we recognize there is a low base here comparison for consumables particularly in the US, this growth is a good indicator that everyday dentistry has been performed at a slightly higher pace, and I think it’s probably also an indicator that we are taking share in some of these broad categories.
The specialties which we continue to experience positive internal growth in implants and orthodontics and just slightly negative internal growth in endodontics has held up pretty well throughout the recession. I think it’s important to note that our specialty business in the aggregate have reported positive internal growth in all four quarters of 2009.
And although they are not really growing rapidly at this point, they appear to be holding their own in a slow growth pattern, and given the growth that we’ve experienced in these categories, we believe that we continue to outperform the market and take share. The prosthetics market that, that’s the product that are sold primarily to the dental lab continues to be the most economically sensitive as these procedures generally come at a high cost, they are somewhat discretionary and deferrable.
This market continues to contract and we don’t see any meaningful signs of recovery in either the US or Europe at this point. Our geographic growth was much improved in the US with internal growth of 3.0% in total and 4.2% for the dental business, while Europe was a negative 3.5% in total and rest of the world was positive 4.9%.
Couple of observations, the US dental growth reflects chair-side consumable internal growth in the double-digits, and that was aided by an easier comp from the prior, adjusting for our best guess that what really changes in dealer inventory this year versus last, and also for anesthetic product outage last year. We think we probably grew 1% to 2% in consumables in the quarter, and we believe that’s probably more reflective of market growth or perhaps just above market.
Our specialty products in the US continue to grow in the 2% to 3% range this quarter, which is a slight pickup. There also was off at lower comp in the prior year quarter but probably also above market.
And lastly the prosthetics business in the US experienced a double-digit decline in the quarter where in the prior year it was essentially flat, and actually reflects probably unfavorable changes in dealer inventories this year compared to last year. After [ph] the changes in the dealer inventory we believe the prosthetics business would have been down probably mid single digit.
Europe also showed growth in consumables and implants in the quarter but to the extent we have seen in the US, well lab results were negative in Europe. Just a reminder that Europe was still growing in the 3% to 4% range in the fourth quarter of last year’s, so this a region where we are actually up against tougher comps in the prior year.
At this point it’s evident to us that US market is likely to recover first, and with the economic trends in the earliest stimulus that was applied in the US, we believe it will emerge and begin to grow earlier and perhaps faster than Europe, which of course, enters the recession later and had less stimulus to exit the year, the recession at this point. In the rest of world categories, usual to mix bag, however, we saw particular strong or improving growth in Latin America, Canada, Japan and Australia.
Overall, a positive trend seems to be developing in numerous regions. On the earnings side, we produced $0.50 per diluted share in the quarter on a GAAP reported basis and $0.48 on a non-GAAP basis or 6.7% improvement on a non-GAAP basis, and this was in fact a record fourth quarter for the company on an earnings basis.
Bill will speak more to the components, but at a high level, we did continue to experience gross margin contractions this quarter as we brought inventories down. However, I feel that we are probably getting closer to a point where we need to be on inventory and I would now expect production in the quarter to return to match closer to demand levels, and this should give us some relief from the cost absorption issues that we face for a couple of quarters and allow some sequential improvement in gross margins as we enter 2010.
For the full year 2009, our net sales decreased slightly by 1.5%. That includes precious metals.
Excluding precious metals, it was basically flat. It was down one-tenth of 1% versus the record revenue that we recorded in 2008.
Internal growth was negative for the quarter at negative, excuse me, for the year ahead a negative 2.2 in total and a negative 1.3 for our dental business. While both these measures are probably the lowest, we have seen amidst many years, we do think we weathered an extraordinary economic contraction and outperformed many other companies in and outside of the dental industry.
Our acquisition growth for the year was 4.5%, which allowed us to report positive constant currency growth of 2.3% for the full year. Our currency translation was a big headwind for us in 2009; it reduced our sales by 2.4%, which in turn pulled our overall sales for the year to just slightly likely below the 2008 level.
In 2010, we initially had expected some relief from currency; however, the dollar has strengthened really remarkably in the past ten days, such that if rates remained where they are today, we in fact would face a small headwind in 2010. Putting the full year in perspective, sales in 2009 were essentially flat for 2008 and earnings on a non-GAAP basis declined just 2.1% compared with our all-time record of sales and earnings in 2008, and this is despite what turned out to be a very deep recession and a very negative currency environment for us.
One last comment on 2009, we did produce very strong cash flow in the year or it was up close to 8% for the full year. During the fourth quarter, we did step-up our share repurchase program and expect to have additional activity in this area in 2010.
As we said before, business development or acquisition is our primary use for free cash flow, and we hope to see that be more active in 2010. Early in the year we have completed one small transaction and we’ve signed another that we expect to close here in the first quarter.
We entered 2010 with a very strong balance sheet and are well-positioned to take advantage of those opportunities if they arise. Looking forward the rate of any economic recovery I guess still remained uncertain, and we’ll likely develop that at very different paces depending on the region.
At this point we feel the markets are gradually recovering in the US with the possible exception of prosthetics, which we mentioned here this morning. And the markets in Europe are not consistently recovering at this point but very greatly by country and the rest of world category, of course, is mixed.
Chris, I have asked Chris to speak more to the developing growth trends that we see in the markets when he gets his prepared remarks in the few minutes. Overall 2010, we do expect to have positive internal growth probably in the low-single digit range, given the outlook for economic growth in employment levels.
In addition, currently at this point it looks like it could be a modest headwind for 2010 if rates remain where they are today. For our own internal planning purposes, we are considering European currency rates to be comparable in 2010 to what we saw for the full year 2009, which would require the dollar to weaken just a bit from where it is today.
Our earnings outlook is likewise influenced by the dramatic strengthening the dollar in the last week to 10 days. Given the strengthening, we have moved our currency assumptions to be neutral with 2010 as I’ve mentioned, and also adjusted our internal outlook on earnings down by $0.02 a share at both the high-end and the low-end of the range to reflect this currency -- this change in the currency environment.
Accordingly, we are initiating our earnings guidance at $1.90 to $2 per share for all of 2010. Again, this reflects our beliefs that the markets are beginning to improve, but on a gradual basis that we’ll return to a positive internal growth in 2010, and that European currencies will essentially be neutral with the dollar in 2010 compared to 2009.
That concludes my prepared remarks. I would like to now turn the call over to Chris Clark who will discuss our market developments further.
Chris?
Chris Clark
Thank you, Bret. Good morning, everyone.
As Bret mentioned, we’re beginning to see some signs of stabilization or a slight improvement in certain market segments and geographies. I would like to take just a few moments to provide some additional perspective to some of the trends that we are seeing.
As we look at the various markets, it appears that consumable growth may be coming back the fastest. While we were helped by some favorable prior-year comparisons, our consumable business is showing some degree of gradual strengthening over the past two quarters, particularly in the US.
The European consumable market appears to be less uniform thus far in its recovery. We do believe that conditions in UK, France, Italy and Germany as a whole are generally consistent with what we are seeing in the US.
But Spain, CIS including Russia and Eastern Europe continue to face very difficult market conditions due to particularly weak local economies, high unemployment levels, and in some cases continued weak currencies. We did see some improvements in CIS in the quarter as demand appears to have improved a bit sequentially.
One encouraging sign in the quarter as well on the consumable front was a solid improvement on our small equipment product lines indicating that dentists maybe feeling a little more confident and willing to invest a bit more proactively in these types of products. We do believe as a whole we gained market share in the global consumable market during 2009.
As Bret mentioned, our specialties business continues to experience positive growth as a whole, and we believe that we are outperforming market here as well. We don’t see any significant change in the global demand for implants, which we believe are still down mid single-digit.
Although we continue to outpace the growth rate of most of our competitors and grew internally once again in the quarter. We are particularly gaining ground in the US behind investments we’ve made to the US implant businesses over the last few years.
We believe the global endodontic market to be down slightly, although this is probably an area that somewhat less impacted by the economy, at least so far as treatment of symptomatic cases. On the orthodontic side, although we believe the global ortho market is probably flat at best, we continue to post positive internal growth.
And for the year we saw a stronger orthodontic market in Europe as supposed in the US due largely due to differences in reimbursement coverages. Regarding the lab business, this area remains most negatively impacted by the economy, and as Bret mentioned we’re really not seeing any noticeable improvement in market conditions, thus far.
The removable or denture segment of the lab business continues to be more stable at an end user demand level compared to the fixed segment of crown and bridge, which is facing particular pressure from lower cost clinical alternatives to the traditional solutions of precious metal framework or ceramic restoration. Unlike the consumable side, we don’t see any appreciable improvement in the willingness or lapse at this point to invest in equipment.
From a geographic standpoint, I also want to briefly touch on two other areas where we believe our performance continues to solidly outpace market growth. While the Australian dental market probably helps around better than most other developed markets in 2009, we are particularly pleased with our double-digit internal growth performance there, and we do believe that to be well above market growth.
In Japan, while its slightly negative internal growth for the year, indications are there that we outpaced market in Japan by at least five points, again, indicating that we should be making solid market share improvement. We are particularly encouraged by the Japanese performance in light of the significant decline of the private market in Japan, which includes most of the specialty businesses that have been accretive to our growth rate there for the last several years.
I now would like to turn the call over to Bill Jellison, who will cover the financial results for the fourth quarter in 2009 in greater detail. Bill?
Bill Jellison
Thanks, Chris. Good morning everyone.
As Bret mentioned, net sales for the fourth quarter of 2009 increased by 11.9%, and net sales excluding precious metals content increased to 11.3% in the quarter with internal growth of positive 0.6% in the period. Net sales for the full year were 2.2 billion, a decrease of 1.5% over last year or net sales ex precious metals were $2 billion, virtually flat for the year.
The 2009, geographic mix of sales without precious metal content was as follows The US represents 38% of sales, Europe was 41% this year, and the rest of the world was 21% of sales. Gross margins for the fourth quarter were 54.7% of sales ex-precious metals or a decrease of 3.3 percentage points compared to the fourth quarter of 2008.
Gross margins were negatively impacted this quarter by the roll off of the higher cost captured in our inventory last quarter. They were also negatively impacted by unfavorable mix in the period, especially of products within the product category, and by unabsorbed overhead costs as inventories were brought down an additional seven days in the quarter compared to building them by six days in the fourth quarter of 2008.
Although the lower volume driven in part by our inventory reductions were a drag on margins in the latter half of 2009, we should see the cost structure begin to improve sequentially as move into 2010 as production more closely matches sell-through of our products. Full year gross margins were 55.8% ex-precious metals compared to 57.8% last year.
Negative product mix, FX and under-absorbed operating cost were the biggest contributors offset somewhat by improved pricing in the year. SG&A expenses were $180 million or 34.6% sales ex-precious metals in the fourth quarter of 2009 versus 37.2% in the fourth quarter of 2008.
SG&A expenses continued to show improvement compared to last year, both for the quarter and also for the full year. These expenses were not only lower than those in last year’s fourth quarter on a constant dollar basis despite acquisitions, but they were also lower when measured as a percent of sales.
Expenses continued to be tightly controlled in many areas as we worked to not only bring down discretionary costs, but also to reduce various fixed expenses to maintain an appropriate balance, while at the same time making some key investments to drive future growth. Total year SG&A was $723.2 million or 36.3% of sales ex-precious metals in 2009, versus 37.1% in 2008.
Operating margins were 18.2% including restructuring and other expenses in the fourth quarter of 2009. Operating margins were 19.9% on sales ex-precious metals in the fourth quarter of 2009, and 18.3% in the same period last year including restructuring, impairments and other charges.
Operating margins, ex-precious metals on a non-GAAP basis, excluding restructuring, impairments and other charges in both periods were 20.1% for the fourth quarter of 2009 compared to 20.9% in the fourth quarter of 2008. Full year operating margins were 19.1% on sales ex-precious metals in 2009, and 19.1% in 2008.
Operating margins on sales ex-precious metals on a non-GAAP basis excluding restructuring, impairments and other charges were 19.7% in 2009 compared to 20.7% in 2008. Net interest and other expense in the fourth quarter was $4 million or $6.6 million lower than last year’s fourth quarter.
Interest expense was $0.2 million lower in the quarter than last year, and FX transaction losses and other expenses were $6.4 million lower in the quarter compared to the same period last year, as last year was negatively impacted by the volatility in foreign exchange rates in the period. Net interest and other expense for the full year was $17.8 million or an expense reduction of $7.7 million for the year.
Net interest expense was 16.8 million in 2009 compared to net interest expense of $15.4 million in 2008 or an increase of $1.4 million. Although, interest expense was lower in 2009, the low interest rate and invested cash caused net interest expense to increase during the year.
The impact of foreign exchange transaction losses and other items in 2009 was an expense of $1 million in 2009 versus an expense of $10.1 million in 2008 or an expense reduction of $9.1 million. This primarily related to the significant foreign exchange transaction losses that occurred in the back half of 2008.
The tax rate for the fourth quarter was 23.5% compared to 5.9% in the fourth quarter of 2008. However, the operational tax rate in these periods were 26.9% in the fourth quarter of 2009 and 22% in the fourth quarter of 2008.
The 2009 full year tax rate of 24.5% included an operational rate of 26.1% compared to 25.9% in 2008. You should note that while the FX transaction impact was favorable in the fourth quarter, the negative impact of our operational tax rate nearly offset this benefit in this period.
To better understand and follow some of the following comments, you can look at the tables included in our recent press release which reconciles performance from US Generally Accepted Accounting Principles or GAAP to adjusted non-GAAP performance. Net income attributable to DENTSPLY International for the fourth quarter of 2009 was $75 million or $0.50 per diluted share compared to $71 million or $0.47 per diluted share in the fourth quarter of 2008.
On an adjusted basis, earnings excluding restructuring, impairments and other related items and tax adjustments in both periods which constitute a non-GAAP measure were $72.6 million or $0.48 per diluted share in the fourth quarter of 2009 compared to $67.8 million or $0.45 per diluted share in the fourth quarter of 2008, an increase of 6.7% in diluted earnings per share. Net income attributable DENTSPLY International in 2009 for the full year was $274.4 million or $1.83 per diluted share.
Net income for 2008 was $283.9 million or $1.87 per diluted share. Net income for comparability purposes on a non-GAAP basis excluding the reconciling items in the press release for the years ending 2009 and 2008 were $275.7 million and $285.5 million respectively.
This represents earnings of $1.84 per diluted share for 2009 compared to $1.88 in 2008, a decrease of 2.1% for the year. In looking at our cash flow and some balance sheet related items, our operating cash flow was $117 million generated in the fourth quarter of 2009.
Operating cash flows for the year were approximately $362 million compared to $336 million in 2008. Capital expenditures were $56 million for the year with depreciation and amortization for the year totaling $65 million.
Inventory days ended the year at 99 days for 2009 yearend versus 103 days last year or in 2008. In the first half of the year, inventories crept up, production levels weren’t cutback as quickly as a falloff in sales.
However, in the last half of the year, inventory levels were reduced by 11 days as specific actions were taken to get inventories back in line. Receivable days ended 2009 at 55 days compared to 61 days at the end of the third quarter of 2009, and 54 days at the end of 2008.
We were very pleased with the significant improvement we saw from both our collection efforts and the improved liquidity of our customers that they experienced in the fourth quarter. This along with the further assessment of our bad debt reserve and specific receivable write-offs allowed us to have a reduction in our allowance for doubtful accounts in the period.
We are hopeful that these improvements will continue as global liquidity continues to improve as we move through 2010. The balance sheet has strengthened even further during 2009 and end the year in very good shape.
The year ended with $450 million in cash and short-term investments with total debt of $470 million at the end of 2009. DENTSPLY repurchased 2.5 million shares for $79 million in 2009 based on the company’s authorization to maintain up to 17 million shares of treasury stock, we still have approximately 1.2 million shares available for repurchase.
We have repurchased approximately 1.7 million shares in the fourth quarter and expect to continue to have some additional share repurchased in 2010. We continue to monitor both the market’s liquidity and our investment needs in making these decisions.
In looking at 2009, we believe currency translation impacts at current foreign exchange rate should have a slightly negative sales and earnings impact for the year, and the recent volatility in these markets make it even more difficult to predict. Our guidance is based on a slightly weaker dollar at levels closer to 2009 average exchange rates.
We are also facing SG&A headwinds north of a half of percentage point of sales as commission expenses, bonuses and customer rebate levels are reset to reflect the more normalized budget. We are anticipating some improvements in gross profit margins during the year, which will also help to offset some, if not more than offset, the SG&A headwinds.
Global economic markets are also beginning to show signs of improvement and we are hopeful that the improvement will continue. We believe, as the global economies improve, the global dental market will also be able to return to positive growth once again in 2010.
As Bret stated, our guidance for earnings in 2010 is in the range of $1.90 to $2 per diluted share. This excludes restructuring and other costs and income tax related adjustments.
While we will be focused on sales growth and gross profit margin improvements for the year, we are also confident of our position in the market and we will continue to make investments to support our business as well as for our future sales and earnings growth. That concludes our prepared remarks, and we will be glad to answer any questions that you may have at this time.
Operator
(Operator Instructions) We’ll take our first next question from Derek Leckow with Barrington Research. Please go ahead.
Derek Leckow – Barrington Research
Thank you, good morning everybody.
Bret Wise
Good morning.
Bill Jellison
Good morning.
Derek Leckow – Barrington Research
On the comments, Bret, about the internal growth rate in dental 1.3% positive, later on you said that the chair-side consumables were up in double-digits, and grew I think 1% to 2% if you excluded something unusual in there. Can you explain that a little bit better?
Bret Wise
Sure, Derek. What I was trying to – give you some background on it.
As you might remember last year in the fourth quarter – going into the fourth quarter actually last year, at the end of the third quarter, we implemented some price increases that were above kind of our historic norm.
Derek Leckow – Barrington Research
Okay.
Bret Wise
And that pulled product into Q3 last year and out of Q4 last year. So we created kind of a low base for Q4 last year.
And the second issue was, at the end of the third quarter last year, we warned that we’re suffering an outage at our manufacture for dental anesthetics in US, it suffered a plant outage, and that we would be out of the market in the fourth quarter for anesthetics, and that in fact happened. So last year’s internal growth rate for consumables, which is the two, the categories affected by both of those items was artificially low.
And that causes the comparison this year to be artificially high. So we were trying to reconcile that down for you, for purposes of understanding the mid-teens type consumable growth for us this year.
Derek Leckow – Barrington Research
Okay.
Bret Wise
I think what I would add to that, and perhaps, I should have that in our prepared remarks was, when we were exiting third quarter we had told you that the same circumstance had caused third quarter’s internal growth to be low by about half a point to a point; this is for 2009 growth. It has the counter effect on Q4, meaning our worldwide growth was probably helped by half a point to a point because of the circumstances, and that’s the background I was trying to give you.
Derek Leckow – Barrington Research
I think you characterized as being sort of a return to normalized levels of inventory in the channel as opposed to being something that may have brought in any revenue from Q1?
Bret Wise
Yes, that’s true.
Bill Jellison
Correct.
Derek Leckow – Barrington Research
Okay, good, I understand that. And then just to take look at the gross margin contractions, what percentage of that change would be, or how many basis points were attributable to the under-absorption issue?
Bret Wise
I may let Bill address that, but first I like to have an overview comment on that.
Derek Leckow – Barrington Research
Okay
Bret Wise
Just to make sure everyone is clearly, we saw, when we entered the recession late last year, early this year, we saw inventories rise pretty dramatically in Q4 of 2008 and Q1 of 2009. So, that created -- that bubble in inventory of course, created excess absorption in our costs, I mean it improved our cost last year.
This year in the third quarter we brought inventories down by, I don’t know the exact amount, four or five days, and some of those costs were hung up, that under absorption was hung up in inventory cost at the end of the third quarter. In the fourth quarter we brought them down another seven days and none of those costs are hung up in inventory at the end of the fourth quarter.
So, in the fourth quarter, we took that absorption hit for both the inventory reduction in the third quarter and the fourth quarter, compared to building inventory in the prior year. So, I think that’s the overview kind of, Bill can you give more on the specifics.
Bill Jellison
That’s exactly correct on the swing in the production levels, which makes a big difference and how we are absorbing the overhead in those products, but the impact specifically in the fourth quarter was about 170 basis points of that margin change.
Derek Leckow – Barrington Research
Okay, understood. And then going into next year, you are looking for improvement, I guess that improvement would begin at the beginning of the year, right?
It wouldn’t necessarily be something that creeps up throughout the year or is that – is a fair way to look at that?
Bret Wise
I think generally, yes. I mean, we believe that we should be able to run the plants now to meet demand, not lower than demand levels.
That should give us improved margins as we enter 2010.
Bill Jellison
Yes, I think sequentially you’ll see some of that, Derek, between the fourth quarter and first quarter, although on a year-over-year comparison you won't see as much of that really until the back half of the year.
Derek Leckow – Barrington Research
All right. And then as I can look at the guidance, the comments that you made of, what are you assuming in there for interest and other expense, if you could help us with that line?
And that as well you are going to be buying back more stocks, it looks like with that cash balance where it is and maybe you want to comment on what you are assuming for deal. I don’t think normally you don’t give guidance on what you assume for acquisition activity but those numbers are really just the internal growth expectations, right.
Bill Jellison
Yes, I mean, in our guidance we don’t anticipate any M&A activity that hasn’t occurred, and likewise our guidance, we do have an authorization for stock buybacks right now, I think that there is 1.2 million left in it, but it doesn’t contemplate in the share repurchases beyond that.
Derek Leckow – Barrington Research
So, I should kind of assume 149 kind of shares outstanding for next – for 2010?
Bill Jellison
I think that part of that’s depending on obviously what add to the stock price because the dilution of it, but yes that's at least reasonable in the range.
Derek Leckow – Barrington Research
And the interest and other expense line would that to be kind of --?
Bill Jellison
In the interest and other expense line, Derek, we really don’t give specific guidance associated with that obviously. We are expecting to generate enough significant amount of cash again this year.
It depends on how we deploy that cash whether in acquisitions or stocks buybacks, but it also – it’s obviously highly dependent upon where those interest rates go, I mean, that was one of the biggest negative impacts in 2009 for us, was that at the beginning of the year we were making over 3% at our interest income from our investments and by the end of the year we were making about 20 basis points.
Derek Leckow – Barrington Research
But the biggest one factor this year probably the currency and that’s the part I am having trouble –
Bret Wise
Yes. And on that category though Derek, just like for us, swings on the currency if within that category of line is only the difference in transactions that are occurring in that period and the volatility that occurs specifically within that quarter.
So, even in our forecasting we generally forecast that to be zero or flat because literally it could move in either a positive or negative direction within the specific quarter.
Derek Leckow – Barrington Research
Okay. All right, thank you very much, guys.
I appreciate it.
Chris Clark
Thanks. You’re welcome.
Operator
Thank you. We will take our next question from Jeff Johnson with Robert Baird & Co.
Please go ahead.
Jeff Johnson – Robert W. Baird & Co.
Thank you. Good morning, guys.
Bret Wise
Hey, good morning.
Chris Clark
Hey, good morning.
Jeff Johnson – Robert W. Baird & Co.
Wondering at first Bret, if we can just focus on some of the strategic investments, I am sure you don’t want to tip your hand too much, but you know what it is, one of the reasons you are talking about guidance where it is, and just wondering if you can provide any more color around those investments?
Bret Wise
I will give you a little bit, but not much. We have been focused on two areas, one is enhanced R&D investments in certain businesses, which we began implementing last year and going into 2010 we expect to be a little bit higher.
And secondly, we did initiate a sales force expansion in one of our businesses in the fourth quarter, which we kind of gave you heads-up to going when we exited the third quarter and that sales force expansion is pretty much in place now, and there will be some more additional marketing expenses behind it here in 2010. So I think its two areas, its R&D and it’s the sales force expansion.
Jeff Johnson – Robert W. Baird & Co.
And Bret, I think that sale force expansion was in the dental implant areas, is that correct or can you talk about that?
Bret Wise
We haven’t given any guidance as to where that expansion took place.
Jeff Johnson – Robert W. Baird & Co.
All right, fair enough. And then acquisition growth a little higher in the quarter, I'm assuming that wasn’t just a huge pick-up in Dermac [ph] or something, was there a deal in Q4 that actually contributed to the number?
Bret Wise
No. I think what's – the 5.1% acquisition growth in the fourth quarter was driven by the businesses that we have bought performed really well.
So, we don’t count the organic growth that happens in an acquisition in the first year as organic growth, we count it as acquisition growth. But I think that’s an indicator to you that those, the acquisitions performed pretty well here in the fourth quarter.
And the other indicator, of course, would be the line in the income statement where we back out the income attributable to the – but we own less than a 100%, we back out the income that’s attributable to the minority interest.
Jeff Johnson – Robert W. Baird & Co.
Yes, now I got you. On the Dermac [ph] side, did that at all then contribute a little bit to the gross margin pressure as well in the quarter?
Bret Wise
Yes, it did – it hadn’t anniversaried yet, so it’s – but it's now anniversary and it won't contribute to it anymore presumably.
Jeff Johnson – Robert W. Baird & Co.
Yes. And Bill, I guess, you can help me out on that point, then just if a 170 BPs in the quarter was lack of overhead absorption on the inventory side, how much was mix at least in deals that have now anniversaried?
Bill Jellison
Yes, on deals that are anniversaried, it's been an impact of around, just under half a percentage point. Keep in mind, that those acquisitions are still obviously in our numbers moving forward, it's just not a reduction of a comparable.
Jeff Johnson – Robert W. Baird & Co.
Okay, that’s fair. So don’t necessarily add the 170 and the 50 together and assume sequentially you go up 220 BPs?
Bill Jellison
Correct, correct, yes. For those period sequentially, that’s right.
Jeff Johnson – Robert W. Baird & Co.
Yes. Now fair enough, but I guess the gross margin comment that I am a still little uncertain on, the point that I am uncertain on, why did the Q3 lack of overhead absorption in inventory rolled into Q4, but then the Q4 lack of overhead absorption rolled into Q4 as well, just was it -- can you explain that timing issue a little bit more?
Bill Jellison
Sure. It’s really based on the size and the impacts of those activities, in fact, and if you looked at the third quarter some of the cost that were being under-absorbed and the higher expense levels within that period still hit the third quarter, just that because of the magnitude that carried over some into the fourth quarter and rolled up with the inventory, wherein this quarter the majority of it had actually occurred within the third quarter and some also within the fourth quarter, but by time, that inventory rolled of, it still followed into the first quarter period, it didn’t impact the first quarter.
Jeff Johnson – Robert W. Baird & Co.
Bill Jellison
I think Europe is -- our visibility in Europe is much less than our visibility in United States. There is a lot of things happening there today even about how they are going to deal with the currency issues across some of these countries that are still facing a pretty substantial crisis, and there was news out this morning about some helping out Greece.
I think in the developed part of Europe, we got -- we have more visibility and Chris commented that there appears to be some signs of improvement there as well, but in the countries like that you have mentioned, the old CIF countries, Spain, Greece, to a lesser extent Italy, there is still a lot of uncertainty. One thing is certain and that is that the negative that we had last year in some of those countries may become neutral now.
It may not improve but it may be neutral with the comparison, and by eliminating that negative it could have a positive impact on our growth in the region.
Jeff Johnson – Robert W. Baird & Co.
Great, and remind me, Bret, those areas account for maybe in the ballpark of 15% of Europe?
Bret Wise
They’ll obtain 10% to 15% probably.
Jeff Johnson – Robert W. Baird & Co.
10% to 15% of it, fair enough. And last question then just for Bill, the sales percentages by geography, I know you provided for 2009, could you provide just the Q4s, and also just what tax rate on an operational basis should be in 2010?
Thanks.
Bill Jellison
You are talking about the geographic mix, I’m sorry in the fourth quarter, is it so Jeff?
Jeff Johnson – Robert W. Baird & Co.
Yes, I know you provided it for the year but I don’t know, I don’t want to have to do the math.
Bill Jellison
Sure, no problem. In the United States, it was actually up just under 32% for the quarter.
Europe was actually stronger 44.3%, and the rest of the world is 23.6%.
Jeff Johnson – Robert W. Baird & Co.
And that’s on a reported basis, right?
Bill Jellison
That’s on a ex-precious metal.
Jeff Johnson – Robert W. Baird & Co.
Ex-P.M. but reported, so currency is what helped Europe go up there I am assuming.
Bill Jellison
Yes, that’s correct.
Jeff Johnson – Robert W. Baird & Co.
Okay, and then just operational pact rate [ph] for 2010?
Bill Jellison
And we haven't – kind of stage at what that is, but I think that’s reasonable to assume that the rate should probably stay in the same kind of range as 2009.
Jeff Johnson – Robert W. Baird & Co.
All right, great. Thanks guys.
Bret Wise
Thank you.
Operator
Thank you. We will take our next question from John Kreger with William Blair.
Please go ahead.
Natalie Nadler – William Blair
Hi, thanks. It’s actually Natalie Nadler, in for John today.
I was hoping that you could talk some more about what you are hearing from your sales force on piece and traffic turns in dental offices these days, and if you are seeing any changes there?
Chris Clark
Natalie, it’s Chris. I would characterize it as a mix bag overall, maybe up slightly.
I don’t think we have seen any hugely appreciable change, but I guess, I would say that the US consumables market -- consumables market in general would probably be the best parameter of that in terms of just general traffic flow. Obviously, we are feeling a little bit more positive about that trends in that segment.
So I would say, maybe slightly up.
Natalie Nadler – William Blair
Okay, great. And then Bill, I know you typically target 20 to 50 basis points of improvement in operating margin, is that still in your guidance for 2010?
Bill Jellison
As we’ve talked about, one, we don’t give specific guidance on the margin side of the equation year-over-year, but I think it’s fair to say that if you looked at the lower end of our range that’s probably assuming very little, probably zero margin related improvements. But, if you go to the top end of the range it would absolutely include margin improvement.
Natalie Nadler – William Blair
Okay. Thanks very much.
Operator
Thank you. Our next question comes from Larry Marsh, Barclays Capital.
Please go ahead.
Larry Marsh – Barclays Capital
Thanks and good morning. Maybe if I could, elaborate a little bit on your working capital.
Obviously you guys continue to do a great job in managing that, and it seems like the story for 2009 was really pulling down inventories to match demand. Sort of I want to make sure, if I heard it correctly, you were suggesting now with inventories, you think you are going to grow in line with revenues this year?
And if so, then where else -- do you anticipate getting any other benefits on the working capital line anywhere else on your balance sheet?
Bill Jellison
Larry, this is Bill Jellison. I think that it's fair to say that our expectations as we mentioned on the inventory side is that we are expecting inventories to track more in line with what our sell-through level is on the products.
We probably have a slight improvement expected on the inventory side, maybe a day or two but not a lot in comparison to the 2009 numbers. As far as account receivables are concerned, I’d say that we believe they are in very, very good shape right now, even in this type of market.
And I would probably not expect much improvement, maybe a day, we don’t see any deterioration but there probably wouldn’t be much of improvement of at the level that existed at the end of the year.
Larry Marsh – Barclays Capital
Bill Jellison
CapEx for 2010?
Larry Marsh – Barclays Capital
Yes.
Bill Jellison
For 2010, I mean, keep in mind that 2009 we were down significantly obviously because of the lower volume levels at 56. I think it's fair to assume that our CapEx would probably rebound up to more of a normalized level probably in kind of that mid 70-ish kind of range in comparison to what it had been in the past.
Larry Marsh – Barclays Capital
Right. So, I guess the message is, I mean given even with a challenge of free cash flow this past year was up quite nicely.
So, it sounds like just on the free cash flow line given big boost in CapEx and little less benefit on inventories you would anticipate free cash flow were to be flat to down versus '09?
Bill Jellison
Well, I think it's fair to say that the swing on the CapEx side would absolutely have an impact on the free cash flow, and that's probably a reasonable assumption is right in that range. Although, the expectation on both the earnings side as well as some of our other management related activities will contribute to drive that cash.
But I think that it’s fair to assume kind of in the assumption that you are looking at there.
Larry Marsh – Barclays Capital
Okay, second question on, sort of tax rate, I know you -- to just question you had said about – assume about the same level this year than last year, but as far as you think about the next couple of years, I just kind of confirm is your -- are there additional opportunities in your view to bring that down or given the challenging global budget situations for most countries, that’s going to a tougher road to hold?
Chris Clark
Well, I think that on our side of the equation that you know that is a key part of our general strategy, and it’s been across the board, and we’re driving that at each of our different divisions. So we would absolutely expect to still see some improvements over the next couple of years in those areas.
Larry Marsh – Barclays Capital
Okay, that’s consistent with what you said in the past. Second question, just to confirm what you had said, I mean, basically currency is a -- FX is a source of volatility and how you, sort of, think about guidance like you had said in your prepared comments just the strengthening dollar here in the last month pulled out a couple of sets in your range, I just want to make sure I heard that correctly?
And then just besides the up ticks of translation, how well does volatility in currency markets, essential volatility specially versus EURO impacts your business as you plan 2010?
Bret Wise
Yes, Larry, let me take a stab at that and then I think Bill wants to revisit this last question on tax. What transpired was that the dollar, of course, had weakened pretty substantially against the euro and the Swiss francs up until about three or four weeks ago, and then just in the last week, I mean, it’s kind of since last Friday the dollar dramatically strengthened against the euro in particular--
Larry Marsh – Barclays Capital
Yes.
Bret Wise
And I would say that the comments in our prepared remarks were intended to let you know that if we were to had issued our guidance, let's say two weeks ago, it would have been higher than what it is today, meaning that dramatic change in the currency particularly against the euro but also to a lesser extent against the Swiss currency, drove us to lower our guidance a couple of cents on both the top end and the low end of the range. So, I guess for people that had issued their own guidance before that, they wouldn’t have had the opportunity to take that into account, and we're trying to send you a signal now that needs to be taken into account.
We don’t try to predict currencies in our own guidance. I mean, we said this year we're going to kind of, we're assuming it’s going to be kind of be neutral, European currencies against US currency, neutral in '010 versus '09, which would fire a slight weakening in the dollar, not a lot but just a little bit.
But within our range of guidance the $1.90 to $2, of course, there is room in there for different levels of currency. There is room in there for different levels of internal growth, and as Bill said a moment ago, different levels of operating margin expansion.
I'm going to let Bill now address kind of how you should understand what the movement in the currency would mean to us on the bottom line and then I think he wants to read us the tax question.
Bill Jellison
Sure. Just on the currency side of the equation, what we generally do is give a rough benchmark there that if currencies move across all currencies against the dollar in the same direction by about five percentage point.
That probably has, obviously 60% of our business is international has a top line impact on us of about three percentage points plus or minus depending on the movement of the FX. And then, at the bottom line its probably has an impact of about a penny a share roughly per quarter impact for us.
Now, again that’s based on if all currencies are moving in the same direction, which is generally not the case, I mean, most recently you’ve seen obviously moves with the yen strengthening against the dollar while some of the other currencies have actually weakened. Larry, just to also revisit one of your last questions, I was thinking you were still actually on working capital related activities over the next few years, I think your question actually was on the tax rate?
Larry Marsh – Barclays Capital
Yes.
Bret Wise
And if that’s the case we think then in 2010 we are still, as I mentioned to Jeff, we are still probably targeting a range that’s similar to what we are in 2009. As you move beyond that, I think that a lot of it is still up in the year based on what both domestic tax related issues and changes will be especially as some of the things on the international related income from what the Obama administration has at least discussed or identified, and then also what a number of other municipalities both domestically as well as other international locations will in dealing with their funding related needs.
Based on all of that, I would expect that our tax rate would definitely more than likely increase once we get past 2010, depending on what those changes really are.
Larry Marsh – Barclays Capital
All right And then directionally, though I know since way far in the future, but when you sort of think about increases is that in the magnitude of 50 to 100 BPs or as you now think about your five-year plan, are you concerned that it could be -- you could be faced with a couple of hundred bops increasing your tax rate?
Bret Wise
Well, I think obviously some of the comments out of the Obama administration obviously are concerning to, I think, any international related company. But, there is a lot of issues around those discussions yet, a lot of negotiations that’s going to take place.
I don’t know where those are ultimately going to end up, but you can be assured that we are already thinking on different concepts on what we need to be doing in light of some of that moving forward, and we’ll try and do the most appropriate tax planning that we can in light of those changes.
Larry Marsh – Barclays Capital
Got it. Okay.
And just to clarify, you $0.10 range in guidance obviously moving just in the last week because of currency, it sounds like some of that wide range – no I’ll step back, a year ago you had a $0.10 range partly due the uncertainty in the economy, I mean this year your visibility of the economy is better, but it terms like you’re signaling that the volatility and currency is still there, it’s not potentially more volatile as you think about this year?
Bill Jellison
Yes, although Larry, I think, although our visibility has improved but that’s clearly true. It's not nearly back to what it was two three years ago, at this point.
Larry Marsh – Barclays Capital
Right.
Bill Jellison
I mean, there is still much uncertainty. So I think the $0.10 range on our part was due to some of the variables you mentioned there, but as well as it's just hard to predict a full year’s result at this point to the level of accuracy that we think we could have done that a few years back.
Larry Marsh – Barclays Capital
Okay, and then a final quick question. Japan, you mentioned you’re taking share there, have you a sort of bracket Japan in terms of strength relative to say Europe and US?
And then how do you think about the rest of Asia for a business, and remind us roughly speaking how much Asia is in terms of your total volume?
Chris Clark
Yeah, Larry, it's Chris. I think in terms of Japan, the market in Japan is in far worst shape from a market growth standpoint when you compare it to the US and to Europe.
Mainly because the economy is not good at shape and as well the private sector in particular, which is approximately 20% of the market has been particularly hard hit. Despite that actually, as I mentioned we’re pleased with our results there while we didn’t grow internally and we are slightly negative.
In fact, we were well better in the market and that’s an area that we have continued to make some investments into, and continue to grow that business. We are pleased in general with how that’s performing.
In terms of Western Asia, I would say, west characterization has been kind of -- some of these western world’s countries being -- regions being a mixed bag, I think, that’s pretty indicative of the Asian areas as well. I think we have some countries where we had particularly strong performances.
Taiwan for us was actually quite solid. India, we have some solid performance, but we have some as well that were challenging, aspects of the Korean business were challenging and aspects for China were challenging this past year.
Asia as a group, just quickly looking at this -- it’s about 5% of the overall business, ex-Japan. Japan is roughly -- it’s about the same, so together about 10%.
Larry Marsh – Barclays Capital
Got it, okay. Great, thank you.
Operator
Thank you. And our next question comes from Scott Green with Bank of America.
Please go ahead.
Scott Green – Bank of America
Hi, thanks for the question. You said that seven days of inventory changes was worked around a 170 basis points of gross margin headwind, if I heard you correctly?
Is that a reliable model to use going forward to think about the gross margin impact based on inventory changes?
Chris Clark
No, it’s not. And that’s because if you look at what took place in the fourth quarter is you not only had the impact of the fourth quarter itself, but you also had some of the carry-over impact from the third quarter.
You also had it in comparison to periods the prior year that were actually building inventory. So, really we didn’t like the fourth quarter, there was like about a 13 day swing factor between last year of our 2008 fourth quarter and 2009.
Scott Green – Bank of America
Okay, okay. And did you say in 2010, there would be a swing factor of a couple of days that I heard you right?
Bret Wise
We believe that, I think a reasonable, a slight improvement after those days, so flat to an improvement of one to two days I think is a reasonable assumption.
Scott Green – Bank of America
Okay. Improvement going up so a GM [ph] tailwind or?
Bret Wise
No that's an improvement in reducing inventories.
Scott Green – Bank of America
Okay. So there would be another slight headwind then.
Bret Wise
Slight, yes.
Scott Green – Bank of America
Okay.
Bret Wise
I think the way to think about that, Scott, is every year we have targets to reduce inventories, and this year 2009 was a little bit unusual in that, as the recession occurred inventory, we believe inventory got away from us a little bit in the fourth quarter of '08 and the first quarter of '09. And thus we had to struggle all year to bring it back down and we brought down dramatically in the back half of 2009.
But any year we would have some goals to bring inventories down somewhat.
Scott Green – Bank of America
Okay. Got it.
And as I think about your guidance for internal growth, you said low single-digits. And in thinking about the industry model that suggest that the dental market grows a point or two faster than the economy, DENTSPLY typically a premium to that.
So is it fair to say that you are suggesting economic growth of no better than flat if you are growing low single digits internally?
Bret Wise
No, I think the way you should think about that, and this is just a little perspective. Dentistry is usually a lagging indicator.
We will go into a recession later than the rest of the economy, and typically become out of it later. In part that's due to the tie to employment levels, particularly here in the United States where you get your dental insurance from your job.
So if you are unemployed you don’t have dental insurance generally. So were little bit of a lagging indicator, but I think that we probably follow the same economist that you do, our expectation right now is that GDP in the US will probably in the two range and slightly lower in Europe at this point would be our overall economic assumptions.
Scott Green – Bank of America
Okay, and a question on implants, it seems like the industry participants were reporting somewhat wide range of a growth rates across the board, and I was wondering how sticky you believe your market share gains are in that segment given the complexity of the procedure. And I recall last June you hosted your first US implant Dental Symposium and I was curious what other initiatives you have lined up to build on your momentum there?
Chris Clark
Well, I think our improvement in implants is due to two things, one is we are investing in the business including sales and marketing resources, R&D etcetera, and second of all we got -- at least a really good platform in our two implant lines ankylosed and zybez [ph]. So we have been able to take share and I do believe it’s pretty sticky.
The larger one that we have this year is Barcelona in March where we are hosting our -- we do this every other year, our Global Implants Symposium. We expect it to be about 3000 surgeons at that meeting.
So that’s a large marketing form force for this year.
Scott Green – Bank of America
Okay and then one last question, on the share count you said around 149 million, I guess over the past couple of years before 2009 we were accustomed to seeing a 150 million or maybe a little more in share repurchase activity when you might have had a little lower cash balance, and we are still making acquisitions. So, has anything changed there in your capital deployment strategy or outlook?
Chris Clark
No, our priorities for cash deployment are acquisitions first. That could be companies or technologies.
Second, it would be share repurchases, and third, we do have a modest dividend and we usually increase the dividend in line with earnings growth. And those priorities have remained the same.
Scott Green – Bank of America
Okay. Thank you.
Chris Clark
Okay. Misty [ph] we are running a little long here.
Why don’t -- I think we have time for one more question from the field and then we will have to conclude.
Operator
Okay, absolutely. We'll take our last question from Jason Rodgers with Great Lakes Review.
Please go ahead.
Jason Rodgers – Great Lakes Review
Thanks for taking the question.
Bret Wise
Sure.
Jason Rodgers – Great Lakes Review
On the reimbursement front, I wonder if you could talk about any significant changes or potential changes globally, you may be monitoring for 2010.
Bret Wise
Sure. And of course this is a mix bag as you might expect.
Of course, in our major markets in the US, we haven’t seen companies really cutback on dental insurance a whole lot. So the trend there is that the people lose their jobs, they lose their insurance generally speaking.
So I think there is a slight reduction in reimbursement in the US. In Europe and the major countries of Europe we have been pulling them, there is always a chance that you would see a reduction in reimbursement particularly if its government supplied reimbursement.
Although the countries under the most pressure in Europe are not really government reimbursed. So at this point we don’t expect any changes in Europe.
The one area where we do expect to change is Japan, which frankly has some of the highest reimbursement rates in the world. And we’ve become accustomed to the Japanese lowering their reimbursements slightly every couple of years.
And at this point we think that they maybe due for another reduction in reimbursement. Historically, they have brought it down about 10 points when they do bring it down.
This year kind of the signal from our business there and our reading on the TV [ph] say it might be less than 10, but nevertheless we probably expect a slight reduction reimbursement in Japan.
Jason Rodgers – Great Lakes Review
Okay. Thank you.
Bret Wise
Okay. Thank You
Operator
Thank you. We have no further questions, I would like to turn the conference back over to Mr.
Bret Wise.
Bret Wise
Okay, Missy, thank you. As mentioned, I think it’s important that we do some signs of recovery in certain markets.
As we’re entering 2010 we have renewed confidence that we'll be able to return to earnings growth this year. We thank you for your continued interest in DENTSPLY and we look for very much to updating you on our progress as we go through the year.
Thank you.
Operator
This concludes today’s teleconference. You may disconnect at any time.
Thank you and have a great day.