Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.



Published on

  • Be the first to comment


  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>