DENTSPLY International Inc. XRAY recently announced that it has reached an agreement with German works council to restructure portions of its laboratory business. The process will impact operations in two of the company’s manufacturing sites in Germany.
The reorganization will help DENTSPLY focus on developing innovative prosthetic materials. The company also plans to exit the low-margin lab equipment (CAD/CAM) and fabrication business. The initiative is part of the company’s broader strategy to improve manufacturing efficiency, which will help it to achieve 20% operating margin by the end of 2017.
In order to achieve this objective, DENTSPLY is realigning its businesses into three parts – manufacturing businesses that sell predominately through distribution, manufacturing businesses that sell directly to end users and finally geographic selling locations. As part of the plan, DENTSPLY consolidated three manufacturing units and several field offices in 2014 and spent approximately $9.9 million in restructuring.
Management believes that the laboratory business restructuring in Germany will cost roughly $33 million to $38 million, most of which will be recorded in the second quarter of fiscal 2015. Approximately 85% of this cost will be in cash, which will be expended for severance and employee-related obligations.
We believe DENTSPLY’s restructuring plans will help in revamping European sales going forward. The equipment business has been a drag for quite some time now and the company’s decision to exit some of it, promises to do well for the top line. Excluding the laboratory business, sales in Europe remained flat on a year-over-year basis in the recently concluded first-quarter 2015.
Apart from realigning its business model through restructuring and consolidation of manufacturing units, DENTSPLY is focusing on launching new innovative products in the European market. In the International Dental Show (IDS) at Cologne, the company showcased a number of new products, which were primarily focused on the consumables part of the dental market.
Products like WaveOne GOLD, X-Smart iQ, VDW and CONNECT Drive are expected to expand penetration in Europe. DENTSPLY also unveiled its preventive and restorative product portfolio at IDS, which are also expected to drive market expansion in the continent.
Nevertheless, DENTSPLY expects continued but slow growth across most of Europe. Foreign exchange volatility is expected to remain a sizeable headwind in 2015. However, we believe that the emerging markets of Latin America, Pacific Rim, Asia-Pacific & the Middle East/Africa provide significant opportunities for the company as these areas are vastly untapped with low dental product penetration.
Stocks to Consider
Currently, DENTSPLY carries a Zacks Rank #3 (Hold). Better-ranked stocks include AmerisourceBergen ABC, Merit Medical Systems MMSI and Masimo MASI. All the stocks carry a Zacks Rank #2 (Buy).
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