Dental Insider Blog

Observation and Commentary On the Dental Industry

Dentsply Downgraded by FTN Midwest Securities

Posted by dentalinsider on January 25, 2007

I received an email from a reader today with an attached report from FTN Midwest Securities where they are downgrading Dentsply International (XRAY). FTN Midwest did some research and contacted both the discontinued dealers and those that remained in the preferred dealer network. Here are the key points:

• We are downgrading XRAY* from BUY to a NEUTRAL.
• We believe the company is having difficulty transitioning customers to
its authorized distributors following its Sept-06 decision to consolidate
its U.S. dealer network from several hundred to 28.
• Our survey of dental distributors that lost access to XRAY’s product
line suggests that on average 77% of former XRAY product sales
have been successfully converted to other brands. In addition,
dealers that have retained access to the line are reporting only
marginal benefits.
• We are reducing our 1H07 XRAY internal growth estimates to
4-4.5%, or the lower end of the company’s typical guidance (4-6%) to
reflect our expectation for slower growth in its U.S. business.

“Overall, we believe XRAY will eventually benefit from its plan to consolidate its dealer network. Authorized dealers have agreed to provide XRAY with sales data, by product, for each customer. In the long-term we believe the data collection efforts will allow XRAY to better target market its sales efforts and promotional activity, ultimately leading to brand conversion.

In the near-term, however, XRAY will be negatively impacted by product returns from discontinued distributors. While investors largely anticipate XRAY to report slow 4Q06 internal growth due to this issue, our concern is that the company may have difficulty transitioning dentists from discontinued dealers to authorized distributors and lose revenue in the process. “

Download the report here Adobe Acrobat File

Looks like the discontinued dealers are having an impact on Dentsply and will continue in the future. Dentsply will release Q4 numbers on February 7, 2007 and I suspect they won’t tell much of a story since the discontinued dealers could purchase product through November 27, 2006. Lets see what story the Q1 and Q2 numbers will tell. I think that the people at FTN Midwest are on the right track, but I don’t see Dentsply recovering from this decision to consolidate….ever. Dentsply underestimated the power of relationships.

DI

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2 Responses to “Dentsply Downgraded by FTN Midwest Securities”

  1. I’m sure all of this was in the master plan of Dentsply. I just can’t wait to see the day that they actually pull their products from all of the current authorized dealers. Dentsply is making it so that eventually they will know what every dentist buys then they can sell their products straight to the dentist and use the laboratory they own in China to send all of the cases out to them. I’m glad to see that Dentsply’s stock is not doing very well I hope it keeps on going down.

  2. Major said

    I don’t disagree with Shawn, but I don’t agree 100%. I don’t think Dentsply has made up their mind yet, and they want to see how the market plays out over the next few years. The industry is going to break one of two ways and they want to be prepared for either scenario. So in my mind they are “having their cake and eating it too.”!

    I just wonder why Schein and Patterson are going along with this. I mean in the long term they stand to lose if Dentsply takes an all direct route. So is the short term enough of a reward? Sure they get a good 5 year run out of the products, but then Dentsply says “see ya” and they can’t sell their products? Seems awful screwy to me. And let us not remember the way this played out on the wires when XRAY announced this move. Remember how the comments were released, it seemed Schein and Patterson had their releases out before XRAY even announced. So there is way, way more to this situation than meets the eye. The whole situation is so twisted and incestuous it makes my head spin.

    Shawn brought up another good point, the lab in China. I have not heard much about this lately and it seems if Dentsply is selling it to their lab customers they are doing it rather quietly. No marketing (at least publicly) and you just don’t hear much about what is going on. Are there any labs or otherwise that know how they are handling this situation?

    Major

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