Facing an economic slowdown, dentists delay big purchases

As recessionary ripples spread across the U.S. economy, the dental industry is feeling the effects on many levels. Consumables are still selling (no surprise there), but sales of more costly products such as imaging equipment and diagnostic tools are suffering the effects of delayed decision-making by a dental community that is experiencing its own slowdown.

According to the most recent ADA Survey of Economic Confidence of Dentists, conducted during the third quarter of 2008 and drawing 1,749 respondents:

• 51% of respondents reported declining incomes.
• 53% reported an increase in open appointment time.
• 45% said gross billings were lower.
• 47% said they were not at all confident about future gross billings.

Such statistics are wreaking havoc with some dental equipment companies. One of the hardest hit is Sirona Dental Systems. The maker of CAD/CAM and imaging systems for dentistry saw its 2009 first-quarter revenues drop 10.2% ($20.4 million) year over year, to $179.7 million (end-December 31, 2008). Net income for the quarter was $5.6 million, compared to $17 million for the same quarter a year ago.

According to a company press release, Sirona's CAD/CAM business fell 13%, while its instruments business was down 14% and its imaging systems business dropped 5%. Revenue in the U.S. declined by 6%, driven by lower CAD/CAM systems segment sales, according to the company. Outside the U.S., revenue decreased 12%, as revenue declines in Europe more than offset gains in other international markets.

Sirona Chairman, President, and CEO Jost Fischer said the company's latest quarterlies "are in-line with our expectations" and that "we remain confident in the prospects for our business."

Robert W. Baird analyst Jeffrey Johnson was more cautious in his analysis. "While we're impressed with the technology behind the recently introduced Cerec AC, we now find ourselves worried that margins associated with it may be lower than we suspected. This, combined with limited visibility ahead of the March 2009 IDS [International Dental Show] tradeshow, keeps us on sidelines."

Dental product supplier Young Innovations also saw its sales and profits decline in the most recent quarter (Q4 2008, end-December 31), although its financials for the year were fairly stable. Sales for the quarter were $23.9 million, a decrease of $1.1 million, or 4.5%, from the $25 million reported in the fourth quarter of 2007. Net income declined 13% to $3.1 million, compared with $3.6 million in the fourth quarter of 2007.

Sales for the year were $99.1 million, up 1.8% from $97.4 million in the prior year, while net income for the year was $12.2 million, down 5.8% from $12.9 million in the prior year.

"Consistent with the third quarter, fourth-quarter demand for our consumable products continued to be strong and was offset by weak performance in our diagnostic product line," the company stated in a press release. "Our consumable products, which include our preventive, infection control, applicator, and home care product lines, posted solid growth in the quarter. Our diagnostic product line posted disappointing results, with revenue $1.6 million below that for the fourth quarter of 2007. We believe this product line continues to be negatively affected by ongoing economic uncertainty, as we witnessed a significant increase in purchase deferrals."

Johnson also sees more trouble ahead for Young Innovations. "Continued diagnostic/x-ray pressures and commentary that Q4 fall-off was related to 'significant increase in purchase deferrals' likely reflects growing challenges for the dental equipment market. That said, we remind investors that [Young]'s equipment results have lagged for two-plus years due to issues that are largely company specific," he said.

Some bright spots

On a more positive note, sales at Dentsply were up 9.6% in 2008, reaching $2.2 billion for the year, while net income rose to $283.9 million, up from $259.7 million in 2007. The company attributed the increase in sales to strong growth in the specialty product areas of endodontics, implants, and orthodontics, according to a press release.

While sales in the fourth quarter of 2008 fell 6.2% to $508.1 million, compared to $541.5 million in the fourth quarter of 2007, net income was up slightly. Net income for the fourth quarter of 2008 was $71 million, compared to $70 million in the fourth quarter of 2007.

"We are pleased to have delivered strong growth in both sales and earnings in 2008, despite the challenges presented by the world economy in the fourth quarter," Dentsply Chairman and CEO Bret Wise said in a press release. "We continue to focus on investing in growth opportunities in the global dental market while managing our cost structure to ensure flexibility in our operating model as we move into 2009."

Baird's Johnson agrees. "We continue to believe strong balance sheet/cash flows and management's decision to invest in the near term despite current headwinds positions [the] company well to exit [the] current downturn in even stronger competitive position."

Another company that appears to be weathering the economic storm -- at least for now -- is Align Technology. The company posted better-than-expected profits for the fourth quarter of 2008 (end-December 31), but is forecasting a weak first quarter due to anticipated declines in consumer spending.

Net revenues for the fourth quarter of 2008 were $74.1 million, compared to $72.5 million reported in the fourth quarter of 2007. For all of 2008, net revenues of $304 million were up 6.9% from $284.3 million reported in 2007.

"Despite the challenges of fiscal 2008, we had many significant accomplishments," said Thomas Prescott, president and CEO, said in a press release. "We successfully launched three new products, grew annual revenues during the worst business environment in decades, and took action to reduce the company's cost structure."

However, he added, "As we embark on a new year, the economy remains very difficult and our outlook is more uncertain."

They are not alone.

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