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Dental Industry Financial Update <ul><li>Dental Trade Alliance </li></ul><ul><li>2008 Annual Meeting </li></ul><ul><li>Ed ...
Introduction <ul><li>FTN Midwest Securities </li></ul><ul><ul><li>Division of First Horizon National (NYSE: FHN)  </li></u...
Introduction <ul><li>Ed Snyder </li></ul><ul><ul><li>Senior Analyst, Managing Director </li></ul></ul><ul><ul><li>Coverage...
Presentation Outline <ul><li>Brief historical overview </li></ul><ul><ul><li>Dental expenditure growth  </li></ul></ul><ul...
Dental Market Analysis <ul><li>Strong, consistent industry growth </li></ul><ul><ul><li>Widely-known industry drivers </li...
Historical Dental Expenditure Growth <ul><li>U.S. dental practice expenditures – CMS data  </li></ul><ul><ul><li>Dental ex...
Dental Stocks – Relative Performance <ul><li>Is time different?  Wall Street certainly thinks so! </li></ul><ul><li>Our de...
Dental Stocks – Forward Estimate Valuation <ul><li>From 2003 to 2007, our dental stock composite traded at 20x-24x forward...
Dental Industry Concerns - Investors <ul><li>Dental investor psychology is very negative. </li></ul><ul><ul><li>Economy is...
Dental Industry Investor Concerns <ul><li>Negative commentary from several dental industry analysts has compounded investo...
FTN Midwest Dental Industry Thesis <ul><li>We think Wall Street’s perception of reality is wrong! </li></ul><ul><ul><li>Va...
FTN Midwest Dental Practice Survey <ul><li>We contact 125 dental practices each month to discuss wait times for dentist an...
FTN Midwest Dental Practice Survey <ul><li>While our surveys suggest overall demand for dental services is marginally slow...
FTN Midwest Dental Laboratory Survey <ul><li>Our survey of 30 privately-held dental labs suggests the market grew 2.8% yea...
FTN Midwest Dental Laboratory Survey <ul><li>We believe weaker unit volume growth in the fixed restorative market (particu...
Anesthetics – Consumable Growth Proxy? <ul><li>Our contacts suggest dental anesthetic sales are normally a good proxy for ...
Dental Consumable Growth Analysis <ul><li>We estimate the North American dental consumable market grew 5.8% in 2Q08.  For ...
Dental Consumable Pricing Survey <ul><li>We have conducted annual distributor list pricing surveys 2001 and monthly list p...
FTN Midwest Dental Equipment Research <ul><li>1Q08 dental equipment market growth was clearly slower. </li></ul><ul><ul><l...
Dental Equipment Analysis – High Tech <ul><li>Dentists are investing in high-tech equipment to save chair time and drive r...
Dental Equipment Analysis – CAD/CAM <ul><li>The chairside dental CAD/CAM market has returned to positive double-digit grow...
Dental Equipment Analysis - CBCT <ul><li>We estimate the North American installed base of CBCT systems was 1,100-1,200 at ...
Economic Stimulus Plan – Tax Changes <ul><li>Section 179 U.S. Tax Code  </li></ul><ul><ul><li>Small business owners can no...
Economic Stimulus Plan – Tax Changes <ul><li>New tax incentives offer the opportunity for considerable first year savings ...
Economic Stimulus Plan – Tax Changes <ul><li>We believe new tax incentives contributed to strong growth in the North Ameri...
Dental Industry Growth Analysis <ul><li>Despite a modest slowdown in 1H08, we expect the combined dental consumable and eq...
Stock Recommendations
Conclusion <ul><li>Would you like to receive our research? </li></ul><ul><li>Contact me: </li></ul><ul><ul><li>Phone: 216-...
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Transcript of "2008-AM-Ed-Snyder-Pr.."

  1. 1. Dental Industry Financial Update <ul><li>Dental Trade Alliance </li></ul><ul><li>2008 Annual Meeting </li></ul><ul><li>Ed Snyder </li></ul><ul><li>FTN Midwest Securities </li></ul><ul><li>Senior Analyst, Managing Director </li></ul><ul><li>July 25, 2008 </li></ul>
  2. 2. Introduction <ul><li>FTN Midwest Securities </li></ul><ul><ul><li>Division of First Horizon National (NYSE: FHN) </li></ul></ul><ul><li>An institutional investment research firm </li></ul><ul><ul><li>Sector focus: health care, technology and business services, manufacturing and industrial, consumer, and financial institutions </li></ul></ul><ul><ul><li>30 senior analysts </li></ul></ul><ul><ul><li>Our primary focus is Independent Market Research (IMR) </li></ul></ul>
  3. 3. Introduction <ul><li>Ed Snyder </li></ul><ul><ul><li>Senior Analyst, Managing Director </li></ul></ul><ul><ul><li>Coverage group </li></ul></ul><ul><ul><ul><li>Dental Manufacturers (XRAY, SIRO, ALGN, BLTI, YDNT) </li></ul></ul></ul><ul><ul><ul><li>Dental Distributors (PDCO, HSIC) </li></ul></ul></ul><ul><ul><ul><li>Dental Laboratories (NADX) </li></ul></ul></ul><ul><ul><ul><li>Orthopedic Implant Manufacturers (SYK, ZMH, SMA) </li></ul></ul></ul><ul><ul><ul><li>Medical Waste Treatment (SRCL) </li></ul></ul></ul><ul><ul><li>Dental research coverage - 16 years </li></ul></ul>
  4. 4. Presentation Outline <ul><li>Brief historical overview </li></ul><ul><ul><li>Dental expenditure growth </li></ul></ul><ul><ul><li>Industry performance in recessionary periods </li></ul></ul><ul><li>Current investor perception of the dental industry </li></ul><ul><ul><li>Valuation analysis </li></ul></ul><ul><li>Our IMR analysis of the dental sector: </li></ul><ul><ul><li>Dental practice level </li></ul></ul><ul><ul><ul><li>Doctors, dental laboratories, anesthetic volume </li></ul></ul></ul><ul><ul><li>Dental consumables </li></ul></ul><ul><ul><ul><li>Pricing analysis </li></ul></ul></ul><ul><ul><li>Dental equipment </li></ul></ul><ul><ul><ul><li>High technology, basic equipment </li></ul></ul></ul>
  5. 5. Dental Market Analysis <ul><li>Strong, consistent industry growth </li></ul><ul><ul><li>Widely-known industry drivers </li></ul></ul><ul><ul><ul><li>Favorable demographics </li></ul></ul></ul><ul><ul><ul><li>Longer retention of natural teeth </li></ul></ul></ul><ul><ul><ul><li>Increasing number of people with dental insurance </li></ul></ul></ul><ul><ul><ul><li>Limited reimbursement risk (U.S.) </li></ul></ul></ul><ul><ul><li>Recession resistant, not recession proof </li></ul></ul><ul><ul><ul><li>Expected to be defensive investment in turbulent market environments </li></ul></ul></ul>
  6. 6. Historical Dental Expenditure Growth <ul><li>U.S. dental practice expenditures – CMS data </li></ul><ul><ul><li>Dental expenditures: +8.7% CAGR since 1960 </li></ul></ul><ul><ul><li>Dental expenditures: up at least 4.8% annually since 1960 </li></ul></ul><ul><ul><li>Dental expenditures have held up well in the six U.S. recessions since 1965 </li></ul></ul>
  7. 7. Dental Stocks – Relative Performance <ul><li>Is time different? Wall Street certainly thinks so! </li></ul><ul><li>Our dental stock composite (including PDCO, HSIC, XRAY, and SIRO, weighted by market capitalization) has traded roughly in-line with the poorly performing S&P 500 over the last year. </li></ul>
  8. 8. Dental Stocks – Forward Estimate Valuation <ul><li>From 2003 to 2007, our dental stock composite traded at 20x-24x forward earnings. </li></ul><ul><li>Our dental stock composite is currently trading at a 34.5% discount to its five-year mean. </li></ul>
  9. 9. Dental Industry Concerns - Investors <ul><li>Dental investor psychology is very negative. </li></ul><ul><ul><li>Economy is #1 concern for dental industry investors </li></ul></ul><ul><li>Dental investors’ thesis: </li></ul><ul><ul><li>The economy is soft </li></ul></ul><ul><ul><li>Disposable income is shrinking </li></ul></ul><ul><ul><li>A larger percentage of dental procedures are discretionary </li></ul></ul><ul><li>Financial Impact (according to dental investors): </li></ul><ul><ul><li>Slowing practice volumes will hurt consumable product sales </li></ul></ul><ul><ul><li>Practice profits will shrink </li></ul></ul><ul><ul><li>Dental equipment sales will suffer </li></ul></ul>
  10. 10. Dental Industry Investor Concerns <ul><li>Negative commentary from several dental industry analysts has compounded investor concerns. </li></ul><ul><ul><li>Off Wall Street (PDCO) </li></ul></ul><ul><ul><li>Robert W. Baird (PDCO / XRAY) </li></ul></ul><ul><ul><li>Douglas Kass Barron’s Interview (DHR / PDCO / HSIC) </li></ul></ul><ul><li>1Q08 reported results helped support negative thesis </li></ul>
  11. 11. FTN Midwest Dental Industry Thesis <ul><li>We think Wall Street’s perception of reality is wrong! </li></ul><ul><ul><li>Valuation levels over compensate for changes in dental industry performance. </li></ul></ul><ul><li>Our IMR indicates: </li></ul><ul><ul><li>Concerns of slowing dental growth are overstated </li></ul></ul><ul><ul><li>Our practice and lab surveys suggest procedure mix has changed within the dental practice </li></ul></ul><ul><ul><li>Higher year-over-year consumable prices help mitigate slower unit growth </li></ul></ul><ul><ul><li>Dental equipment remains a strong catalyst for growth in 2H08. </li></ul></ul>
  12. 12. FTN Midwest Dental Practice Survey <ul><li>We contact 125 dental practices each month to discuss wait times for dentist and hygienist appointments. </li></ul><ul><li>2Q08 survey results: </li></ul><ul><ul><li>Net 3% of dental practices had longer hygienist wait times </li></ul></ul><ul><ul><li>Net 2% of dental practices had shorter dentist wait times </li></ul></ul>
  13. 13. FTN Midwest Dental Practice Survey <ul><li>While our surveys suggest overall demand for dental services is marginally slower, there were clear regional differences. </li></ul><ul><ul><li>Most favorable business conditions: Northeast and Central regions </li></ul></ul><ul><ul><li>Least favorable business conditions: Midwest region </li></ul></ul>
  14. 14. FTN Midwest Dental Laboratory Survey <ul><li>Our survey of 30 privately-held dental labs suggests the market grew 2.8% year-over-year in 2Q08. </li></ul><ul><ul><li>Based on our surveys, we believe dental lab market growth is down from 2007 (up 3-4%), but slightly better than1Q08 </li></ul></ul>
  15. 15. FTN Midwest Dental Laboratory Survey <ul><li>We believe weaker unit volume growth in the fixed restorative market (particularly for large cases) is the main reason overall dental lab growth has slowed modestly in 1H08. </li></ul><ul><li>Higher gold prices are helping to expedite the market transition from PFM restorations to all-ceramic restorations and causing a shift to less expensive alloys within the PFM category. </li></ul>
  16. 16. Anesthetics – Consumable Growth Proxy? <ul><li>Our contacts suggest dental anesthetic sales are normally a good proxy for dental consumable growth. We believe this is an abnormal year. </li></ul><ul><li>Because of supply concerns, many doctors stockpiled anesthetic inventory during 1H07. </li></ul><ul><li>With difficult comparisons, dental anesthetic sales growth has been negative in 2008. </li></ul><ul><li>We do not believe this is indicative of negative procedure volume growth in the dental market. </li></ul>
  17. 17. Dental Consumable Growth Analysis <ul><li>We estimate the North American dental consumable market grew 5.8% in 2Q08. For FY08, we expect 5.5% growth. </li></ul><ul><li>We believe consumable growth has declined slightly during recent quarters. Some of this slowness is related to sales days. </li></ul><ul><li>We believe investors have overreacted to the modest slowdown. </li></ul>
  18. 18. Dental Consumable Pricing Survey <ul><li>We have conducted annual distributor list pricing surveys 2001 and monthly list pricing surveys since 2007. </li></ul><ul><li>Our research suggests list prices have increased 5% year-over-year in 2Q08. Distributors are passing on higher price increases from manufacturers. </li></ul><ul><li>Net of discounts, we believe dealers have raised prices 2-3% in 1H08, up from 1-2% increases in 2007. </li></ul>
  19. 19. FTN Midwest Dental Equipment Research <ul><li>1Q08 dental equipment market growth was clearly slower. </li></ul><ul><ul><li>Comparison issues had as much, if not more, impact than the economy </li></ul></ul><ul><li>We expect low-double-digit 2Q08 dental equipment growth and stronger results in 2H08 driven by new (potentially one-time) tax incentives. </li></ul>
  20. 20. Dental Equipment Analysis – High Tech <ul><li>Dentists are investing in high-tech equipment to save chair time and drive revenue. </li></ul><ul><li>We expect strong double-digit growth in most high-tech dental equipment categories, including: </li></ul><ul><ul><li>Chairside Dental CAD/CAM </li></ul></ul><ul><ul><li>Digital Radiography </li></ul></ul><ul><ul><li>Cone Beam Computed Tomography (CBCT) </li></ul></ul><ul><ul><li>Diode Lasers </li></ul></ul>
  21. 21. Dental Equipment Analysis – CAD/CAM <ul><li>The chairside dental CAD/CAM market has returned to positive double-digit growth following two years of negative results. </li></ul><ul><li>2H08 chairside dental CAD/CAM growth should benefit from milling unit upgrades, positive CEREC new user sales growth, and incremental E4D Dentist system sales. </li></ul>
  22. 22. Dental Equipment Analysis - CBCT <ul><li>We estimate the North American installed base of CBCT systems was 1,100-1,200 at the end of FY07. </li></ul><ul><li>Entry of lower-priced systems should help accelerate market adoption. </li></ul>
  23. 23. Economic Stimulus Plan – Tax Changes <ul><li>Section 179 U.S. Tax Code </li></ul><ul><ul><li>Small business owners can now deduct up to $250,000 in capital investment in the first year of purchase </li></ul></ul><ul><li>Section 168 U.S. Tax Code </li></ul><ul><ul><li>Small business owners can now take an additional 50% in bonus depreciation after the section 179 deduction on purchases up to $800,000 </li></ul></ul>
  24. 24. Economic Stimulus Plan – Tax Changes <ul><li>New tax incentives offer the opportunity for considerable first year savings on capital equipment investments. </li></ul><ul><li>First year savings opportunities are as follows: </li></ul><ul><ul><li>$250,000 capital investment - $35,000 in first-year savings </li></ul></ul><ul><ul><li>$500,000 capital investment - $70,000 in first-year savings </li></ul></ul><ul><ul><li>$750,000 capital investment - $105,000 in first-year savings </li></ul></ul>
  25. 25. Economic Stimulus Plan – Tax Changes <ul><li>We believe new tax incentives contributed to strong growth in the North American dental equipment market in 2003 and 2004. </li></ul><ul><li>When bonus depreciation rolled back to 0% in 2005, dental equipment growth slowed significantly. </li></ul><ul><li>We believe our 2008 equipment growth estimates could prove to be conservative. </li></ul>
  26. 26. Dental Industry Growth Analysis <ul><li>Despite a modest slowdown in 1H08, we expect the combined dental consumable and equipment market to achieve 7% growth in 2008, in-line with 2006 and 2007. </li></ul><ul><li>Our estimates assumes dental consumable and equipment sales will increase 5.5% and 11%, respectively, in 2008. </li></ul>
  27. 27. Stock Recommendations
  28. 28. Conclusion <ul><li>Would you like to receive our research? </li></ul><ul><li>Contact me: </li></ul><ul><ul><li>Phone: 216-592-1911 </li></ul></ul><ul><ul><li>Email: [email_address] </li></ul></ul>
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