What's trickier than getting a rubber band back on a set of braces? Unwinding the earnings report of dental supply company Dentsply
As expected, the company's sales force reduction -- from 200 distributors down to 28 -- caused a drop-off in sales in the U.S., but overall revenue increased more than 5.4% to $471 million. Excluding precious metal content, one of those unwindings, they were up 5.3% for the quarter, and a number of the company's specialty products enjoyed double-digit sales. Considering the dour outlook many analysts had about what the restructuring of its sales force would do to performance, Dentsply was able to sidestep the worst of it so far.
On a GAAP basis, net income jumped to $65 million, or $0.42 a share, compared to a net loss of $725,000 in 2005. Still, those results included $3.6 million in stock-option expenses ($0.02 per share), restructuring costs of $1 million ($0.01 per share), and an $8.8 million income tax expense reduction ($0.06). Keeping only the stock options expense in place, earnings came in at $57.1 million, or $0.37 per share, beating analyst forecasts by a penny. To compare that to 2005, you'd have to remove an intangible assets impairment charge and another income tax expense reduction to arrive at net income of $55.7 million, or $0.35 per share.
The key to Dentsply's future success rests with its ability to implement its new sales distributor program. Back in September, the supply company decided to narrow its distributors from 200 down to the 28 that were distributing 90% of Dentsply's products. Henry Schein
In exchange for the possibility of more business from Dentsply (by taking over customers from the distributors who were let go), as well as increased incentives for incrementally raising sales, the distributors would give Dentsply customer transaction data for each of the products sold. That kind of information will allow the company to better tailor its marketing and sales pitches.
There was some concern that dentists who currently buy from a Dentsply distributor that was being cut out of the loop would not be able to buy Dentsply products from one of the remaining 28 sellers. However, the company said that most dentists buy from two or three distributors, so there was little chance of this happening. With the entire United States covered by this new sales arrangement, it was bound to impact sales initially, and Dentsply had forecast a drop in this geographic region.
Yet management also says that with incentives in place for greater remuneration -- incentives which shouldn't impact margins, since Dentsply will be getting incremental sales growth out of them -- they're expecting 2007 to be their "learning curve" year, and thus they've been conservative with guidance.
There will continue to be many financial gymnastics necessary to derive true performance from Dentsply. But with new marketing data at its fingertips, the company should show continued growth. Enough to make you smile.
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