Dental Industry Financial Update

1
Dental Industry Financial Update

• Dental Trade Alliance
• 2008 Annual Meeting
• Ed Snyder
• FTN Midwest Securities
• Senior Analyst, Managing Director
• July 25, 2008

2
Introduction

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

3
Introduction

• Ed Snyder
• Senior Analyst, Managing Director
• Coverage group
• Dental Manufacturers (XRAY, SIRO, ALGN, BLTI,
  YDNT)
• Dental Distributors (PDCO, HSIC)
• Dental Laboratories (NADX)
• Orthopedic Implant Manufacturers (SYK, ZMH, SMA)
• Medical Waste Treatment (SRCL)
• Dental research coverage - 16 years

4
Presentation Outline

• Brief historical overview
• Dental expenditure growth
• Industry performance in recessionary periods
• Current investor perception of the dental
  industry
• Valuation analysis
• Our IMR analysis of the dental sector
• Dental practice level
• Doctors, dental laboratories, anesthetic volume
• Dental consumables
• Pricing analysis
• Dental equipment
• High technology, basic equipment

5
Dental Market Analysis

• Strong, consistent industry growth
• Widely-known industry drivers
• Favorable demographics
• Longer retention of natural teeth
• Increasing number of people with dental insurance
• Limited reimbursement risk (U.S.)
• Recession resistant, not recession proof
• Expected to be defensive investment in turbulent
  market environments

6
Historical Dental Expenditure Growth

• U.S. dental practice expenditures CMS data
• Dental expenditures 8.7 CAGR since 1960
• Dental expenditures up at least 4.8 annually
  since 1960
• Dental expenditures have held up well in the six
  U.S. recessions since 1965

7
Dental Stocks Relative Performance

• Is time different? Wall Street certainly thinks
  so!
• Our dental stock composite (including PDCO, HSIC,
  XRAY, and SIRO, weighted by market
  capitalization) has traded roughly in-line with
  the poorly performing SP 500 over the last year.

8
Dental Stocks Forward Estimate Valuation

• From 2003 to 2007, our dental stock composite
  traded at 20x-24x forward earnings.
• Our dental stock composite is currently trading
  at a 34.5 discount to its five-year mean.

9
Dental Industry Concerns - Investors

• Dental investor psychology is very negative.
• Economy is 1 concern for dental industry
  investors
• Dental investors thesis
• The economy is soft
• Disposable income is shrinking
• A larger percentage of dental procedures are
  discretionary
• Financial Impact (according to dental investors)
• Slowing practice volumes will hurt consumable
  product sales
• Practice profits will shrink
• Dental equipment sales will suffer

10
Dental Industry Investor Concerns

• Negative commentary from several dental industry
  analysts has compounded investor concerns.
• Off Wall Street (PDCO)
• Robert W. Baird (PDCO / XRAY)
• Douglas Kass Barrons Interview (DHR / PDCO /
  HSIC)
• 1Q08 reported results helped support negative
  thesis

11
FTN Midwest Dental Industry Thesis

• We think Wall Streets perception of reality is
  wrong!
• Valuation levels over compensate for changes in
  dental industry performance.
• Our IMR indicates
• Concerns of slowing dental growth are overstated
• Our practice and lab surveys suggest procedure
  mix has changed within the dental practice
• Higher year-over-year consumable prices help
  mitigate slower unit growth
• Dental equipment remains a strong catalyst for
  growth in 2H08.

12
FTN Midwest Dental Practice Survey

• We contact 125 dental practices each month to
  discuss wait times for dentist and hygienist
  appointments.
• 2Q08 survey results
• Net 3 of dental practices had longer hygienist
  wait times
• Net 2 of dental practices had shorter dentist
  wait times

13
FTN Midwest Dental Practice Survey

• While our surveys suggest overall demand for
  dental services is marginally slower, there were
  clear regional differences.
• Most favorable business conditions Northeast and
  Central regions
• Least favorable business conditions Midwest
  region

14
FTN Midwest Dental Laboratory Survey

• Our survey of 30 privately-held dental labs
  suggests the market grew 2.8 year-over-year in
  2Q08.
• Based on our surveys, we believe dental lab
  market growth is down from 2007 (up 3-4), but
  slightly better than1Q08

15
FTN Midwest Dental Laboratory Survey

• We believe weaker unit volume growth in the fixed
  restorative market (particularly for large cases)
  is the main reason overall dental lab growth has
  slowed modestly in 1H08.
• Higher gold prices are helping to expedite the
  market transition from PFM restorations to
  all-ceramic restorations and causing a shift to
  less expensive alloys within the PFM category.

16
Anesthetics Consumable Growth Proxy?

• Our contacts suggest dental anesthetic sales are
  normally a good proxy for dental consumable
  growth. We believe this is an abnormal year.
• Because of supply concerns, many doctors
  stockpiled anesthetic inventory during 1H07.
• With difficult comparisons, dental anesthetic
  sales growth has been negative in 2008.
• We do not believe this is indicative of negative
  procedure volume growth in the dental market.

17
Dental Consumable Growth Analysis

• We estimate the North American dental consumable
  market grew 5.8 in 2Q08. For FY08, we expect
  5.5 growth.
• We believe consumable growth has declined
  slightly during recent quarters. Some of this
  slowness is related to sales days.
• We believe investors have overreacted to the
  modest slowdown.

18
Dental Consumable Pricing Survey

• We have conducted annual distributor list pricing
  surveys 2001 and monthly list pricing surveys
  since 2007.
• Our research suggests list prices have increased
  5 year-over-year in 2Q08. Distributors are
  passing on higher price increases from
  manufacturers.
• Net of discounts, we believe dealers have raised
  prices 2-3 in 1H08, up from 1-2 increases in
  2007.

19
FTN Midwest Dental Equipment Research

• 1Q08 dental equipment market growth was clearly
  slower.
• Comparison issues had as much, if not more,
  impact than the economy
• We expect low-double-digit 2Q08 dental equipment
  growth and stronger results in 2H08 driven by new
  (potentially one-time) tax incentives.

20
Dental Equipment Analysis High Tech

• Dentists are investing in high-tech equipment to
  save chair time and drive revenue.
• We expect strong double-digit growth in most
  high-tech dental equipment categories, including
• Chairside Dental CAD/CAM
• Digital Radiography
• Cone Beam Computed Tomography (CBCT)
• Diode Lasers

21
Dental Equipment Analysis CAD/CAM

• The chairside dental CAD/CAM market has returned
  to positive double-digit growth following two
  years of negative results.
• 2H08 chairside dental CAD/CAM growth should
  benefit from milling unit upgrades, positive
  CEREC new user sales growth, and incremental E4D
  Dentist system sales.

22
Dental Equipment Analysis - CBCT

• We estimate the North American installed base of
  CBCT systems was 1,100-1,200 at the end of FY07.
• Entry of lower-priced systems should help
  accelerate market adoption.

23
Economic Stimulus Plan Tax Changes

• Section 179 U.S. Tax Code
• Small business owners can now deduct up to
  250,000 in capital investment in the first year
  of purchase
• Section 168 U.S. Tax Code
• Small business owners can now take an additional
  50 in bonus depreciation after the section 179
  deduction on purchases up to 800,000

24
Economic Stimulus Plan Tax Changes

• New tax incentives offer the opportunity for
  considerable first year savings on capital
  equipment investments.
• First year savings opportunities are as follows
• 250,000 capital investment - 35,000 in
  first-year savings
• 500,000 capital investment - 70,000 in
  first-year savings
• 750,000 capital investment - 105,000 in
  first-year savings

25
Economic Stimulus Plan Tax Changes

• We believe new tax incentives contributed to
  strong growth in the North American dental
  equipment market in 2003 and 2004.
• When bonus depreciation rolled back to 0 in
  2005, dental equipment growth slowed
  significantly.
• We believe our 2008 equipment growth estimates
  could prove to be conservative.

26
Dental Industry Growth Analysis

• Despite a modest slowdown in 1H08, we expect the
  combined dental consumable and equipment market
  to achieve 7 growth in 2008, in-line with 2006
  and 2007.
• Our estimates assumes dental consumable and
  equipment sales will increase 5.5 and 11,
  respectively, in 2008.

27
Stock Recommendations

28
Conclusion

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