Dental Industry Financial Update

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Dental Industry Financial Update
Dental Trade Alliance 2007 Annual Meeting
Ed Snyder FTN Midwest Securities Senior Analyst,
Managing Director July 2007
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Introduction

• FTN Midwest Securities
• Division of First Horizon National (NYSE FHN)
• 4.6 billion market cap
• An institutional investment research firm
• Sector focus includes health care, technology
  and business services, manufacturing and
  industrial, consumer, and financial institutions
• 30 senior analysts
• Our primary focus is Independent Market Research
  (IMR)

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Introduction

• Ed Snyder
• Senior Analyst, Managing Director
• Coverage group
• Dental Manufacturers
• Dental Distributors
• Orthopedic Implant Manufacturers
• Medical Waste Treatment
• Dental research coverage - 15 years

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Worldwide Dental Market Analysis

• 16 billion market
• Consumables - 13 billion
• Equipment - 3 billion
• The U.S. accounts for 40 of the worldwide market

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Dental Market Analysis

• Strong, consistent industry growth
• Widely-known industry drivers
• Favorable demographics
• Longer retention of natural teeth
• Increased demand for cosmetic dentistry
• Rising number of people with dental insurance
• Limited reimbursement risk (U.S.)

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Dental Market Analysis

• Key Growth Driver
• Limited capacity to serve increasing demand.
• Number of dentists per capita expected to decline
• Working hours per dentist declining?
• Dentists are seeking efficiency
• Focus on products that save chair time
• Pricing power

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North American Dental Market Analysis

• Expect 2007 market growth to accelerate 110 bps
  to 8.7
• Consumables growth is very consistent in the 6-8
  range
• We believe equipment growth will double this year

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Dental Consumable Analysis

• We estimate the North American dental consumable
  market is growing 5.8 yr/yr this quarter
• Our research suggests growth for HSIC and PDCO is
  over 6 while private distributors are growing
  approximately 5 yr/yr

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Dental Consumables Analysis

• FTN Midwest Private Dental Distributor IMR
• We speak to private dental distributors each
  month to discuss business trends
• Our research suggests dental consumable growth
  for private distributors has improved 50 bps this
  quarter to 5

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Dental Consumables Analysis

• We analyze the dental consumable market from a
  unit/mix and price perspective
• We believe unit/mix growth is up in the
  mid-single-digit range
• Pricing is consistently positive

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FTN Midwest Consumable Pricing Study

• We have conducted annual pricing studies for HSIC
  and PDCO Since 2001
• List price increases generally increase 2-4
  yr/yr
• Net of discounts, pricing increases 1-2 yr/yr
• Largest yr/yr price increase was from HSIC in
  2001 (Up 7.2)

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Dental Equipment Analysis

• We expect dental equipment growth to double to
  16 in FY07
• Expect stable basic equipment growth in the
  low-to-mid single digit range
• High-tech products will account for nearly all of
  the incremental growth

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Dental Equipment Analysis

• High technology growth catalysts
• CAD/CAM
• CBCT
• Digital radiography
• Laser systems

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Dental Equipment Analysis CAD/CAM

• Dental CAD/CAM growth has reached a positive
  inflection point following six quarters of
  negative results

• Growth will be driven by (1) CEREC MC XL
  upgrades and (2) strong new-user sales

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Dental Equipment Analysis CAD/CAM

• Our survey suggests at least 30 of existing
  CEREC users will upgrade to the new MC XL milling
  machine

• MC XL upgrades alone could add 430 bps to dental
  equipment market growth

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Dental Equipment Analysis CBCT

• Significant incremental growth opportunity
• Installed base approximately 1,000 Systems
• Imaging sciences (DHR) is the market leader with
  over 70 share
• Expect over 100 growth in FY07

• Our research suggests that 30 of sales are in
  the GP market

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Digital Radiography

• Penetration still relatively low despite rapid
  growth this decade
• Digital radiography market growing 15-20 yr/yr
• 30 of North American dental offices have at
  least one digital radiography system
• Many offices will ultimately purchase more than
  one system

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Dental Equipment Analysis Dental Lasers

• Diode laser market accelerating
• Survey of 60 doctors suggests steep learning
  curve for hard tissue applications

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Dental Laboratory Market

• Rapidly changing market dynamics
• Survey suggests lab growth is in the 2-4 range
• Production shifting to low-cost, offshore labs
• 20-25 of units manufactured offshore up from
  10-12 in 2005
• Market shifting to ceramic restorations
• Ceramic restorations are now 20-25 of the
  overall market

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Dental Implants

• Nobel Biocare, Straumann - 59 market share
• Strong future growth opportunity
• Low current penetration rates

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Orthodontic Market

• Sustainable market growth opportunity driven by
  mix
• Shift from metal to ceramic brackets
• Clear and self-ligating brackets demand a
  200-300 price premium to traditional metal
  brackets.
• High-single-digit growth market

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Market Consolidation

• Fragmented dental market will consolidate
• Plenty of acquisition candidates remain for
  dental manufacturers and distributors
• New entrants seeking consistent growth and strong
  cash flows could change industry dynamics

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Stock Recommendations

• PDCO Expect FY08 internal growth to reach 10
  (highest level in five years) our FY08 EPS
  estimate is 1.77 ( 0.02 above consensus
  expectations)
• SIRO We believe CEREC growth will provide upside
  to consensus expectations our FY07 cash EPS
  estimate is 1.53 (0.13 above consensus
  expectations)
• HSIC Expect 25 FY07 EPS growth (vs. 20 In
  FY06) our FY08 estimate is 2.98 (0.02 Above
  Consensus Expectations)
• XRAY Expect FY07 internal growth to increase 410
  bps to 5.8 our FY07 EPS estimate is 1.63
  (0.01 above consensus expectations)

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Conclusion

• Would you like to receive our research?
• Contact me
• Phone [phone]
• Email ed.snyder_at_ftnmidwest.com

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Disclaimer

• Although this information has been obtained from
  sources which we believe to be reliable, we do
  not guarantee its accuracy, and it may be
  incomplete or condensed. This is for
  informational purposes only and is not intended
  as an offer or solicitation with respect to the
  purchase or sale of any security. All herein
  listed securities are subject to availability and
  change in price. Past performance is not
  indicative of future results. Changes in any
  assumptions may have a material effect on
  projected results.
• FTN Midwest Securities Corp (MWRE), FTN Financial
  Securities Corp (FFSC), and FTN Financial Capital
  Assets Corporation are wholly owned subsidiaries
  of First Tennessee Bank National Association
  (FTB). MWRE and FFSC are members of the NASD and
  SIPC (http//www.sipc.org/). Equity research is
  provided by MWRE. FTN Financial Group and FTN
  Financial Capital Markets are divisions of FTB.
  FTN Financial Group, through FTB or its
  affiliates, offers investment products and
  services.