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  1. 1. Dental Industry Financial Update Dental Trade Alliance 2007 Annual Meeting Ed Snyder FTN Midwest Securities Senior Analyst, Managing Director July 2007
  2. 2. Introduction <ul><li>FTN Midwest Securities </li></ul><ul><ul><li>Division of First Horizon National (NYSE: FHN) </li></ul></ul><ul><ul><li>$4.6 billion market cap </li></ul></ul><ul><li>An institutional investment research firm </li></ul><ul><ul><li>Sector focus includes: 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 </li></ul></ul></ul><ul><ul><ul><li>Dental Distributors </li></ul></ul></ul><ul><ul><ul><li>Orthopedic Implant Manufacturers </li></ul></ul></ul><ul><ul><ul><li>Medical Waste Treatment </li></ul></ul></ul><ul><ul><li>Dental research coverage - 15 years </li></ul></ul>
  4. 4. Worldwide Dental Market Analysis <ul><li>$16 billion market </li></ul><ul><ul><li>Consumables - $13 billion </li></ul></ul><ul><ul><li>Equipment - $3 billion </li></ul></ul><ul><li>The U.S. accounts for 40% of the worldwide market </li></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>Increased demand for cosmetic dentistry </li></ul></ul></ul><ul><ul><ul><li>Rising number of people with dental insurance </li></ul></ul></ul><ul><ul><ul><li>Limited reimbursement risk (U.S.) </li></ul></ul></ul>
  6. 6. Dental Market Analysis <ul><li>Key Growth Driver: </li></ul><ul><li>Limited capacity to serve increasing demand. </li></ul><ul><ul><li>Number of dentists per capita expected to decline </li></ul></ul><ul><ul><ul><li>Working hours per dentist declining? </li></ul></ul></ul><ul><ul><li>Dentists are seeking efficiency </li></ul></ul><ul><ul><ul><li>Focus on products that save chair time </li></ul></ul></ul><ul><ul><li>Pricing power </li></ul></ul>
  7. 7. North American Dental Market Analysis <ul><li>Expect 2007 market growth to accelerate 110 bps to 8.7% </li></ul><ul><li>Consumables growth is very consistent in the 6-8% range </li></ul><ul><li>We believe equipment growth will double this year </li></ul>
  8. 8. Dental Consumable Analysis <ul><li>We estimate the North American dental consumable market is growing 5.8% yr/yr this quarter </li></ul><ul><ul><li>Our research suggests growth for HSIC and PDCO is over 6% while private distributors are growing approximately 5% yr/yr </li></ul></ul>
  9. 9. Dental Consumables Analysis <ul><li>FTN Midwest Private Dental Distributor IMR </li></ul><ul><ul><li>We speak to private dental distributors each month to discuss business trends </li></ul></ul><ul><ul><li>Our research suggests dental consumable growth for private distributors has improved 50 bps this quarter to 5% </li></ul></ul>
  10. 10. Dental Consumables Analysis <ul><li>We analyze the dental consumable market from a unit/mix and price perspective </li></ul><ul><ul><li>We believe unit/mix growth is up in the mid-single-digit range </li></ul></ul><ul><ul><li>Pricing is consistently positive </li></ul></ul>
  11. 11. FTN Midwest Consumable Pricing Study <ul><li>We have conducted annual pricing studies for HSIC and PDCO Since 2001 </li></ul><ul><ul><li>List price increases generally increase 2-4% yr/yr </li></ul></ul><ul><ul><li>Net of discounts, pricing increases 1-2% yr/yr </li></ul></ul><ul><ul><li>Largest yr/yr price increase was from HSIC in 2001 (Up 7.2%) </li></ul></ul>
  12. 12. Dental Equipment Analysis <ul><li>We expect dental equipment growth to double to 16% in FY07 </li></ul><ul><ul><li>Expect stable basic equipment growth in the low-to-mid single digit range </li></ul></ul><ul><ul><li>High-tech products will account for nearly all of the incremental growth </li></ul></ul>
  13. 13. Dental Equipment Analysis <ul><li>High technology growth catalysts: </li></ul><ul><ul><li>CAD/CAM </li></ul></ul><ul><ul><li>CBCT </li></ul></ul><ul><ul><li>Digital radiography </li></ul></ul><ul><ul><li>Laser systems </li></ul></ul>
  14. 14. Dental Equipment Analysis: CAD/CAM <ul><li>Dental CAD/CAM growth has reached a positive inflection point following six quarters of negative results </li></ul><ul><li>Growth will be driven by: (1) CEREC MC XL upgrades and (2) strong new-user sales </li></ul>
  15. 15. Dental Equipment Analysis: CAD/CAM <ul><li>Our survey suggests at least 30% of existing CEREC users will upgrade to the new MC XL milling machine </li></ul><ul><li>MC XL upgrades alone could add 430 bps to dental equipment market growth </li></ul>
  16. 16. Dental Equipment Analysis: CBCT <ul><li>Significant incremental growth opportunity </li></ul><ul><ul><li>Installed base = approximately 1,000 Systems </li></ul></ul><ul><ul><li>Imaging sciences (DHR) is the market leader with over 70% share </li></ul></ul><ul><ul><li>Expect over 100% growth in FY07 </li></ul></ul><ul><ul><li>Our research suggests that 30% of sales are in the GP market </li></ul></ul>
  17. 17. Digital Radiography <ul><li>Penetration still relatively low despite rapid growth this decade </li></ul><ul><ul><li>Digital radiography market growing 15-20% yr/yr </li></ul></ul><ul><ul><li>30% of North American dental offices have at least one digital radiography system </li></ul></ul><ul><ul><li>Many offices will ultimately purchase more than one system </li></ul></ul>
  18. 18. Dental Equipment Analysis: Dental Lasers <ul><li>Diode laser market accelerating </li></ul><ul><li>Survey of 60+ doctors suggests steep learning curve for hard tissue applications </li></ul>
  19. 19. Dental Laboratory Market <ul><li>Rapidly changing market dynamics </li></ul><ul><ul><li>Survey suggests lab growth is in the 2-4% range </li></ul></ul><ul><ul><li>Production shifting to low-cost, offshore labs </li></ul></ul><ul><ul><ul><li>20-25% of units manufactured offshore; up from 10-12% in 2005 </li></ul></ul></ul><ul><ul><li>Market shifting to ceramic restorations </li></ul></ul><ul><ul><ul><li>Ceramic restorations are now 20-25% of the overall market </li></ul></ul></ul>
  20. 20. Dental Implants <ul><li>Nobel Biocare, Straumann - 59% market share </li></ul><ul><ul><li>Strong future growth opportunity </li></ul></ul><ul><ul><li>Low current penetration rates </li></ul></ul>
  21. 21. Orthodontic Market <ul><li>Sustainable market growth opportunity driven by mix </li></ul><ul><ul><li>Shift from metal to ceramic brackets </li></ul></ul><ul><ul><li>Clear and self-ligating brackets demand a 200-300% price premium to traditional metal brackets. </li></ul></ul><ul><ul><li>High-single-digit growth market </li></ul></ul>
  22. 22. Market Consolidation <ul><li>Fragmented dental market will consolidate </li></ul><ul><ul><li>Plenty of acquisition candidates remain for dental manufacturers and distributors </li></ul></ul><ul><ul><li>New entrants seeking consistent growth and strong cash flows could change industry dynamics </li></ul></ul>
  23. 23. Stock Recommendations <ul><li>PDCO: Expect FY08 internal growth to reach 10% (highest level in five years); our FY08 EPS estimate is $1.77 ( $0.02 above consensus expectations) </li></ul><ul><li>SIRO: We believe CEREC growth will provide upside to consensus expectations; our FY07 cash EPS estimate is $1.53 ($0.13 above consensus expectations) </li></ul><ul><li>HSIC: Expect 25% FY07 EPS growth (vs. 20% In FY06); our FY08 estimate is $2.98 ($0.02 Above Consensus Expectations) </li></ul><ul><li>XRAY: Expect FY07 internal growth to increase 410 bps to 5.8%; our FY07 EPS estimate is $1.63 ($0.01 above consensus expectations) </li></ul>
  24. 24. 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>
  25. 25. Disclaimer <ul><li>Although this information has been obtained from sources which we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumptions may have a material effect on projected results. </li></ul><ul><li>FTN Midwest Securities Corp (MWRE), FTN Financial Securities Corp (FFSC), and FTN Financial Capital Assets Corporation are wholly owned subsidiaries of First Tennessee Bank National Association (FTB). MWRE and FFSC are members of the NASD and SIPC (http : //www.sipc.org/). Equity research is provided by MWRE. FTN Financial Group and FTN Financial Capital Markets are divisions of FTB. FTN Financial Group, through FTB or its affiliates, offers investment products and services. </li></ul>