Joshua Zable – Vice President, Corporate Communications and Investor Relations Jeffrey Slovin – Chief Executive Officer Uli Michel – Executive Vice President and Chief Financial Officer Chris Clark – President and Chief Operating Officer-Technologies Derek Leckow – Vice President-Investor Relations.

Steven Valiquette – Bank of America Merrill Lynch Jon Block – Stifel Tycho Peterson – JP Morgan Steve Beuchaw – Morgan Stanley John Kreger – William Blair Robert Jones – Goldman Sachs Vik Chopra – UBS Matthew O’Brien – Piper Jaffray Brandon Couillard – Jefferies Jason Bednar – Robert W. Baird David Shoten – Great Lakes Review.

Good day and welcome to the Dentsply Sirona Fourth Quarter and Full Year 2016 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Joshua Zable, Vice President, Corporate Communications and Investor Relations. You may begin..

Thank you and good morning everyone. Welcome to our fourth quarter 2016 and full year conference call. I would like to remind you that an earnings slide deck presentation relating to this call is available on our website at www.dentsplysirona.com.

Before we begin please take a moment to read the forward-looking statement on Slides 2 and 3 of our earnings slide presentation. During today's conference call, we will make certain predictive statements that reflect our current views about our future performance and financial results.

We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of our most important risk factors that could cause actual results to differ from our predictions.

And with that, I will now turn the program over to Jeffrey Slovin, Chief Executive Officer of Dentsply Sirona..

Thanks, Josh. It is my pleasure to welcome all of you to our fourth quarter and full year 2016 conference call. Also joining us on the call today Uli Michel, Executive Vice President and Chief Financial Officer; Chris Clark, our President and Chief Operating Officer, Technologies; and Derek Leckow, Vice President of Investor Relations.

In 2016, we delivered on our most challenging strategic objectives. We began successfully integrating our organization, met our financial guidance and captured synergy targets. 2017 will be a pivotal year for our organization, as we execute on plans that will create shareholder value, for years to come.

In 2016, we finished the year with 2.4% internal growth. Our growth came in the face of challenging market conditions. Political instability and lower oil prices impacted merging market economies like Russia Brazil and the Middle East. The Brexit vote added uncertainty in Europe, the U.S.

dental markets slowed down unexpectedly from summer until late in the year. Our diversification in both geography and product portfolio is proving to be a competitive advantage. Coming together at the right time enabled us to accelerate growth through early revenue synergies.

For the full year, we delivered adjusted EPS of $2.78, representing solid net income growth. I am proud of the team's ability to work together to compensate for lower than expected revenues, we delivered earnings at the higher end of our guidance range. In 2016, we made substantial progress integrating our two businesses.

We developed and implemented our first revenue synergy programs, we began reducing cost to make us a more efficient organization and we reinvested some of the savings into growth initiatives. These efforts put us in a better position in 2017 and will enable us to unlock significant value as we move forward.

We remain on time and on track to deliver over $125 million in synergies by the end of year three. We have begun to realize revenue synergies through programs and solutions that we are uniquely positioned to deliver to customers. Commercial strategies such as bundling and loyalty programs began rolling out in middle of 2016.

We are seeing stronger acceptance of them. This will drive increased demand for our products in 2017. We have also implemented cost reduction programs that have begun to pay dividends. And will continue to bear fruit next year. The merger gave us an opportunity to reevaluate our supply chain.

We have proposed and initiated plans to reorganize manufacturing, logistics, and distribution networks in multiple places, including large areas like Germany and Brazil. The efficiency created will enable further reinvestment in the business. While also delivering savings to our shareholders.

This undertaking began in 2016, but we will only begin to realize the benefits in late 2017 and 2018. Our procurement team is leveraging our size and scope to get better terms from vendors. We expect to see savings layout over the course of this year and the next. We have made considerable progress in bringing our commercial organizations together.

This will both increase our level of collaboration and provide more value to our customers. In almost all of the countries in which we operate, we have implemented organizational structures and processes that provide strong product specific focus and leverage our combined market presence in common cost-based.

As cross functional teams come together, we will realize the savings of consolidating multiple offices into central locations, leveraging resources and eliminating redundancies. Many of these plans have been implemented, we will see some benefits in 2017 and realize even more in 2018.

With regard to tax, our merger has already created multiple benefits. Coming together has also unlocked capital deployment synergies. As promised, we delivered $500 million share repurchases shortly after our merger closed. During the quarter, we bought an additional 119 million in stock bringing our total buyback to over $800 million for 2016.

And less than one year between buybacks and dividends, we returned nearly $900 million in capital to our shareholders. We also completed the acquisition of MIS Implants. MIS represents our first entry into the 1.5 billion faster growing value implant segment. We are pleased with the performance of MIS to-date.

We continue to evaluate and gauge on a number of attractive acquisition targets and expect to be active in this area again in 2017. Now turning to our fourth quarter results.

For the quarter, we grew over 4.3% constant currencies supported by the addition of MIS Implants with internal growth of 1.8%, driven by strong growth in rest of world and in Europe. Rest of world delivered 9.4% internal growth, led by a particularly strong quarter in technologies. Europe grew 5.1%, which we also believe is well above market.

Both, our technologies and consumable segments grew. In the U.S., lower technology sales led to a decline of 7%. In November, the decision to change our relationship with our exclusive equipment partner in the U.S. was announced. For 20 years, we have had a unique relationship with Patterson in North America.

Patterson has been a major proponent for the digitalization of dentistry and the Sirona product line particularly CEREC and Schick. In 2012, we further expanded our exclusive relationship and together we drove the increased adoption of digital technologies.

We share the view with Patterson that broadening our go-to-market strategy in North America will accelerate the adoption of our technologies. Our decision to redefine and broaden our go-to-market strategy in no way diminishes our commitment to grow with Patterson.

Our partnership with Patterson is extremely important to us and we highly value them as partners going forward. We have done extraordinary things together, and we will both benefit as demand for digital technologies reaches the tipping point.

As a result of this decision and the transition to a non-exclusive relationship later this year, we sold less product to Patterson in Q4. In large part as they began to reduce inventories in North America. We expect this trend to continue in the first half of 2017 as the relationship transitions.

We believe the change in our go-to-market strategy will begin reaping benefits in growth and accelerating market penetration later this year and into 2018 and beyond. I will comment more on this later, excluding the impact of these actions, the growth of our U.S. business improved from the first nine months rate. Sticking with the U.S.

market, our chairside consumable business saw accelerating sales through trends in the quarter. We see this as an encouraging sign relative to the market and also relative to our underlying performance. We saw improvement in the end markets through the quarter with stronger user sales in December that also carried through to January.

We believe the U.S. market is stable, but is showing signs of improvement. Internal growth for our technology segment was flat in the fourth quarter, driven by declines in the U.S., offset its growth in Europe and the rest of the world. Dental and health care consumables were up 3.5% internally for the quarter. We grew across our all three regions.

Our fourth quarter adjusted EPS was $0.67. I will now turn the call over to Uli, who will review our fourth quarter financials and outlook..

Thanks, Jeff and good morning everyone. This morning, I will discuss our U.S. GAAP results as well as our non-GAAP adjusted results. As I walk through the earnings performance, I will also point out major impacts of merger accounting on our results. In the fourth quarter, our reported revenue increased $325.4 million to $996.5 billion, up 48.5%.

Adjusted sales of our combined businesses, excluding precious metals grew 4.3% on a constant currency basis. Internal growth was 1.8% excluding a 270 basis points favorable impact from net acquisitions.

Jeff already mentioned that as a result of the move to broaden our North American go-to- market strategy, channel inventories were reduced by approximately $30 million or 300 basis points. Foreign exchange movements were a headwind to revenue of 70 basis points.

As a reminder, these growth percentages reflect the performance of the combined business as if the merger had been completed on January 1, 2015. Jeff already addressed revenue growth by geography and segments.

We have provided reconciliation tables for every segment and region that will help you understand how GAAP reported revenue and internal growth come together. U.S. GAAP gross profit was $541.5 million up $166.8 million or 44.5% from $374.7 million in 2015.

Gross profit as a percentage of net sales excluding precious metal content decreased by 290 basis points to 55.1% from 58% in the prior year, as you can see on the non-GAAP reconciliation tables, the gross profit margin was negatively impacted by 310 basis points mostly due to the effect of step-up amortization and other merger-related items.

On an adjusted basis, gross margin was 58.2%, down 60 basis points for the quarter. Unfavorable product mix and foreign currency impacts offset the benefits of savings from the cost reduction programs and favorable product pricing. Reported SG&A expenses, which includes R&D was $399.7 million, up $131.9 million, or 49.2% versus last year.

This equates to 40.7% of sales, excluding precious metals, 80 basis points below prior year. The decrease was primarily the result of Sirona's lower operating expense rate, and savings from the cost reduction programs, partially offset by increased amortization expense and other costs related to the merger.

Adjusted for non-GAAP items, including amortization expense and other costs related to the merger, SG&A expense was $366.7 million, or 37.3% of sales excluding precious metals, representing a 160 basis point improvement. This ratio was largely unaffected by foreign exchange. Restructuring expenses were $7.6 million, down from $13.8 million last year.

In total GAAP operating income was $134.2 million, up $41.1 million, or 44.1% from last year. Excluding the non-GAAP items set forth in our non-GAAP financial measures, adjusted operating margin was 21%, up 110 basis points compared to 19.9% last year.

Margins benefited from the positive impacts of cost reduction programs and the consolidation of Sirona. FX had a negative impact of approximately 20 basis points on the rate.

Net interest and other expense for the fourth quarter declined by $19 million, compared to prior year, the biggest driver of the decline was the absence of bond issuance cost in the current period. For the three months ended December 31, 2016, we recorded U.S. GAAP income tax expense of $24.6 million versus $13.8 million last year.

During Q4, the Company recorded $8.1 million of tax expense related to discrete tax matters. Excluding these tax matters, the Company's effective tax rate was 20.2%. The Q4 effective tax rate was favorably impacted by an update of our annual effective tax rate to 20.8%, this compares to approximately 23% last year.

Our lower tax rate is a benefit resulting from the complementary tax attributes of the merged companies. Q4 U.S. GAAP net income attributable to Dentsply Sirona was $107 million, up 82.6% from the prior year. Fourth quarter 2016 diluted GAAP EPS was $0.46 compared to $0.41 in the prior year. Adjusted non-GAAP net income grew 70.7% to $158.1 million.

Adjusted earnings per diluted share were $0.67, compared to $0.65 last year. Net income growth more than offset the impact of additional share issuance related to the merger. For a reconciliation of GAAP EPS to non-GAAP adjusted EPS, please see our earnings press release.

Cash flow from operating activities during the quarter was $222.4 million compared to $126.4 million last year. Q4 2016 operating cash flows were positively impacted by decreases in working capital. Cash used in investing activities was $46.6 million compared to $68.1 million in the prior year.

The sum of operating and investing cash flows resulted in free cash flow of $175.8 million versus $58.3 million last year. The free cash flow of $175.8 million represents 111% of our adjusted net income. Cash flow from financing activities was $112.7 million outflow versus an outflow of $8.9 million last year.

In Q4 2016, we returned approximately $137 million to our shareholders in the form of buybacks and dividends.

We repaid borrowings under our revolving credit facility and issued $300 million in new long-term debt, as noted on our last quarterly conference call, on October 27, we issued EUR315 million of private placement notes with tenures between eight and 15 years and a weighted average interest rate of 1.4%.

The Company ended the quarter with a cash balance of $383.9 million. As you can see, we finished our fiscal year with a solid financial performance. Now turning to guidance. For fiscal 2017, we expect adjusted non-GAAP EPS in the range of $2.80 to $2.90. Our guidance includes the following assumptions.

Constant currency sales growth to range from 4% to 6%, this includes approximately 150 basis points of the net benefit from acquisitions and divestitures, implying internal growth of 2.5% to 4.5%. At current exchange rates, this translates to reported revenues excluding precious metals of $3.95 billion to $4.03 billion.

We expect to reduce our effective tax rate to 20% in 2017. Our EPS range implies a full year diluted share count of approximately $231 million to $233 million shares versus the $222 million in 2016. This reflects approximately $0.15 headwind at the midpoint and is simply a function of the timing of the merger.

At the current exchange rates, we would estimate FX headwinds of $0.08 to $0.10 for 2017. As mentioned, we are broadening our go-to-market strategy in North America. The midpoint of our guidance implies that by the end of 2017, the markets will be served with approximately $50 million less channel inventory than today.

The first half should see deeper inventory reductions, which will be partially offset by increases in the second half of 2017. Putting all of this together for the full year, represents more than 120 basis points growth headwind. Once our new strategy is fully implemented, we expect growth in North America to accelerate again.

Lastly, also keep in mind that IDS is at the end of March. In the months leading up to the international dental show, we typically experience lower equipment sales in Europe, which impacts our Q1 results. I will now turn the call back to Jeff..

Thanks, Uli. As we look to 2017, we remain confident about the opportunities ahead of us. Our market is attractive and growing. Dentistry's expansion is supported by sustainable long-term demographic trends, growth can ebb and flow from one quarter to one year to the next, but increasing demand for oral care supports a long-term growth trajectory.

In developed markets, increasing focus on early prevention drives patients to the dentist while they are young. As they grow older, they retain more of their natural teeth and demand more care to maintain them. In emerging economies, a growing middle class is paying more attention to oral health which is driving the need for more dental care.

A significant part of our market is private pay. Short-term consumer behavior can impact patient visits or product mix for a quarter or two, but dental care is rarely postpone long. And we do not face the uncertainty associated with other healthcare reimbursement systems.

Looking specifically at Dentsply Sirona, we are a stronger company today than when we began last year together. Coupling technology and consumables is creating a significant growth opportunity in this attractive market. As Dentsply Sirona, we created a special sales force to select consumables to go along with our leading installed base of equipment.

This is a rapidly growing multi $100 million market. In the lab market, we have incorporated an integrated approach to our lab customers in the U.S. and Germany. As the only company to offer best-in-class equipment and consumables, we are seeing strong growth in these markets.

As we roll out this same approach around the globe, we are confident that our lab business will accelerate. We have also implemented unique commercial programs to leverage our broad product portfolio. No other competitor has the leading brands and innovation to offer our value proposition.

These programs remain relatively small, but are gaining momentum. As we expand these programs, you will begin to see the impact on sales growth. We expect to see some of these benefits in 2017. As the innovator in the industry, new products will fuel growth.

In March, we will unveil a record number of new products and solutions at the International Dental Show in Cologne. These products are helping to shape the future of dentistry and will drive growth in 2017 and beyond. One of the key rationales for merging was to create end to end integrated solutions.

At the IDS, we will highlight our unmatched ability to create better, safer and faster workflows. One of these products is our brand-new 3D Endo software. This software is the first and only of its kind, it was developed as a collaboration between our leading engineers, scientists and software developers in both Endodontics and digital radiography.

The new software combines 3D x-ray data with an integrated file library to better analyze, plan and optimize root canals. This makes the endodontic treatments safer and more efficient and it can only be done with our leading Endodontic files.

As we continue to introduce integrated solutions, we are also poised to benefit from the current megatrends in dentistry. Digital dentistry is being adopted rapidly. We are seeing significant growth in the digital impression business as well.

And, for those not ready to go digital, we have a leading solutions for physical impression, including the new AQUASIL ULTRA plus which is growing rapidly, 3D imaging is growing double-digit around the globe. Awareness about single visit dentistry is driving demand for CEREC. Market penetration continues to increase around the world.

In the U.S., adoption is accelerating and 17% of dental offices now have CEREC. To ignite further adoption in the U.S. market, we are expanding our go-to-market approach in the U.S. This will drive faster growth and make CEREC the standard of care. Our North American strategy will drive strong growth in the back half of 2017 and into 2018 and beyond.

Top-line growth reminds at the forefront of our priorities and strategy, but we will also remain committed to driving leverage through our P&L and driving increased profitability. We anticipate earnings growth to accelerate in the second half of the year. And finally, capital allocation is a key component of our strategy.

We intend to be a major consolidator in the dental industry. With our strong balance sheet, we remain focused on our pipeline of deals and a disciplined approach. We set high hurdle rates and expect strong returns. In addition to acquisitions, we intend to consistently return capital to shareholders.

In 2016, we repurchased more shares than in any other year, and this morning, we announced that we have increased our dividend. We are pleased with our organization's accomplishments to-date and are following through on our plans for 2017. As we know, there is more work to be done.

This organization is built for growth and our expectations are to grow faster than market. We are committed to leveraging our infrastructure to expand our operating margins. Our future is bright.

With the innovations we can offer today and our ideas for treating patients in the future, we are enabling dental professionals to improve, change and save lives. I’m confident about what we can achieve together. I like to thank our customers for their loyal support, trust and enthusiasm for Dentsply Sirona.

We are pleased to recognize our distribution partners for their loyal support and I would also like to extend a special thanks to our 15,000 employees who daily show their commitment to improve the lives of dental professionals and their patients. Together, we will change dentistry for the better. We will now address your questions.

Operator, please proceed..

Thank you. [Operator Instructions] We will take our first question from Steven Valiquette with Bank of America Merrill Lynch..

Hi, thanks. Good morning, everybody. Congrats on the results..

Thank you..

All of the color on the destocking is helpful for Q4 and pan to early 2017, so thanks for that.

As we get further in the year, should we think about, could there be any restocking with other distributors as the year goes on? And just curious then if we should expect any further updates on the go-to-market strategy over and above what you talked about today or beyond the exclusivity with the other distributor in North America. Thanks..

Thanks, Steve, for the question. In putting together our guidance, we certainly took into consideration a lot of factors and one of those factors was, some stocking from other dealers in the future, but we don't want to get into the specifics of that now.

And of course, we have de-risked the guidance as well, we certainly have another – a number of options that we are able to follow and that’s why we highlighted the fact that we are redefining our go-to-market, as you know, we have an extraordinary portfolio of products. And there are various parts of the market that we can go to differently.

And that’s what we have thought about as we think about the second half of the year, but you have to keep in mind that we have an exclusive with Patterson, through September, we want to make sure everybody is focused on selling and as it makes sense, we will get into more detail about our go-to-market strategy..

Okay, great. And then just very quickly, is there any update you can offer today on the ClearAligner strategy and is that evolving after for 2017 and beyond? Thanks..

Sure. Absolutely, in a second I will pass this on to Chris, but one of the reasons that we are so excited about being together, is the – where digital dentistry is going and the ortho franchise which once again grew faster than market. And I am excited to see where our manufacturing is going, and what we are able to do on the digital side.

This will take time, but I think this is a big opportunity for us, we see ClearAligners again continuing to be a growth area and one that Dentsply Sirona should play an important role in..

Yes, Steve. I can also add the ClearAligner business or the digital orthodontics more broadly as Jeff mentioned is a key focus area for us both in the near-term and also over time. I would say that the entry we have today in terms of MTM is growing nicely. We are well into double-digit case growth.

And that’s continuing I mean well in – and that’s continuing very nicely both in the U.S. as well as in Europe. We recently received a 510(k) that expands the range of indications basically for that treatment. And that expands the percentage of cases that we can address with our MTM solution.

So we are excited about the progress really with the platform we have with MTM. And we obviously are focusing in terms of broadening that platform and adding to that in terms of digital orthodontics as we move forward..

[Operator Instructions] Our next question will come from Jon Block with Stifel..

Hey, thanks, good morning, I will ask both upfront. Maybe first, Jeff, just thoughts on the traction in rest of world and Europe, which both seem solid, so maybe any color on international markets that are improving and then even are still challenging as we enter 2017. And then second question, Uli, I think, is for you.

Just any more color on the bridge regarding 2017 EPS guidance? You gave some very good color on the revenue, but just in other words, on the EPS side of things as we think about the Patterson destock and how extreme that might be on EPS in the first half of 2017. Thanks, guys..

I think what I would like to do is, Uli why don't you start and then I will talk about what we have been able to do and how I see the outlook for the international market..

Okay, thanks for the question, Jon. I think the best way to think about it is we have done $2.78 this year, we are guiding to a range of $2.80 to $2.90 for arguments sake now let's take the midpoint $2.85, right, we told you that we expect a FX headwind of about $0.08 to $0.10 let’s take $0.08 for the moment.

I think you are also aware of this technical matter of the share count. We issued the shares at the end of February. So we consolidated one very strong month of Sirona at the time March.

And we only had a share count of $178 million in the first quarter of 2016 and the full year share count of 222 we are leaving the year with the share count of $234 million. So we do still anticipate a buyback as we go into next year, we have modeled let’s say buybacks in the tune of $50 million to $100 million per quarter.

But that still leaves us with a share count for 2017 in the range of let's say 231 to 233 let's also take the midpoint 232 so that gives you $0.15 headwind from the share count itself.

Now on the other side, we will consolidate two months of Sirona which we did not last year, that should also be about $0.08 – $0.07, $0.08 so that basically offsets the FX headwind.

So in combination, I would say call it technical headwinds $0.15 you add this to the midpoint of our guidance of the $2.85 you are at $3 a share, and we do this with 5% constant currency growth, it represents about an 8% growth on EPS started with a 5% top line growth.

So that’s not too bad, but it is of course heavily impacted by destock reduction in the U.S. right. The inventories that are being brought down is CAD/CAM and imaging, they are fairly high-margin products, it represents, as we said next year about $50 million. It really doesn't impact our operating expense at all, frankly speaking.

If we sell 1% more or less of CAD/CAM products overall, it doesn’t really impact our operating expense. So, it drops through at the margin let's say it is about 60% margin on average that gives you about $0.10 of headwind from the inventory reduction.

So if you add this back with this $0.12, $0.10 you would be at $3.10 which then would be about a 12% EPS growth with a 6% top line growth and this is kind of I would say the operational set up of the business.

And then, a few things to keep in mind even with all of this, we are still funding significantly initiatives in 2017 that will benefit us for many years to come. We are setting up for a tremendous IDS show. We are investing money in IDS. We are doing a world tour in implants, which we haven't done for many years. We are setting up a new market platform.

So all of this is being funded, we are investing money in new products or keep investing we want to keep the pipeline strong on R&D and product development.

And then we are overcoming a few other what I would call technical headwinds, for example with the termination of the exclusivity, we lose also the amortization because we have set it up as a deferred revenue that ends in September but that costs us about $3 million year-over-year and there’s a few other things which together are about $6 million of other pure technical headwinds or nonrecurring whenever there’s another $0.02.

So I think this gives you a bit of a flavor of the makeup of the EPS growth. I hope it helps..

It really does help. And very, very helpful. And, Jeff….

Absolutely, internationally, I think we posted a quality quarter, Europe up 5.1%, both consumable and technologies showed growth, both Southern and Northern Europe showed growth.

Of course Southern Europe led the way, which was nice to see, albeit the base being lower, but of course Europe continues to be a mixed bag, we started to see some effects from Brexit uncertainty, France gave back some of the gains we had earlier in the year, really pleased to see improvement in Spain and Italy.

And then as you think about in Germany held strong as well, as you think about and by the way, I would like to say that treatment centers had an extraordinary quarter for us this year, record. And as we think about CIS and Russia, we saw improvement, but of course this area continues to be challenged but we did extremely well.

Again, seeing the benefits and the value of Dentsply Sirona, albeit from a lower base, rest of world as we told you would be the growth driver for the year did not disappoint, reaching 9.4%, almost double-digit, extremely pleased with what we saw in Asia and frankly, Japan drove growth, double-digit, which is impressive given the Japanese economy.

Australia continues to be very solid for us. And China, and you have heard a lot in the news about the slowdown in China, also grew double-digits. I’m pleased there and Brazil which has its own issues as a country continued to show growth for us and Latin America. So the Middle East challenged, we have talked about that.

Political instability, and low oil prices continue to be an issue. But all in all, we had an excellent international quarter and I can tell you I believe rest of world will be growth driver again for us next year. And I look around at the regions, and I feel confident, as does the team that each region will grow next year for us.

So, I feel we are well-positioned and it is one of the benefits of our geographic diversification in our portfolio. But keep in mind, that the first quarter, before an IDS will be challenged. But I'm sure we will be talking about this later in the call but the IDS is setting up for an exciting IDS for us..

Maybe one other point to make on rest of world and Europe, it does show that our synergy projects work, we are a bit less restricted in what we can do in these areas and this has shown now in the fourth quarter the first benefits..

Absolutely, correct and an important point..

Great, thank you for the color guys..

Thanks..

And we will take our next question from Tycho Peterson with JP Morgan..

Thanks. Jeff, do you brought up revenue synergies in your prepared comments, a couple of questions there is related to CEREC, would you think your share is on the consumables markets today and how much do you think you can pick up. And just can you maybe just touch on CAD/CAM competitive dynamics in general.

And then my follow-up for Uli, just a quick one for Uli as a follow-up on the tax rate, it sounds like you think the slower rate is sustainable. Can you maybe just talk about the moving pieces there and obviously you are net importer so how do we think about reforming that context? Thanks..

So great question, Tycho about the CEREC consumables, it’s really amazing to look back at both organizations and recognize that we never played a significant role in a category which is hundreds of millions.

And so we are still single-digits in this area, excited about what we are seeing from our installed base as well as our new users, the fact that we have dedicated a team to focus on this, which shows us that with the dental professional is interested in both our Celtra Duo and our zirconia and our platform of materials.

But what’s also important is to recognize as you think about it as the procedural sales, all of the other accessories that come along with it from the cement to the bonding and really the clinical education that helps support the dental professional. When you talk about CEREC, we have seen in the U.S. as reach about 17% of offices having it.

We feel we are close to a tipping point and with the sales force that we have in North America and by the way I was just with them, 1200 strong. And understanding how enabling technologies really supports the procedural sale, this is exciting for us. Now when we look at the landscape, I think an area that has started to pick up is digital impression.

And I would tell you that we are certainly don't feel as though we are getting our fair share there. I think that as a credit to the ortho market, which I believe has reached a tipping point.

But there is no question, the 30 years that we have together, the CEREC is the gold-standard in restorative as we come together with our ortho business, we are able to add more value on that proposition. The clinical data, no product has been written about more about it.

We have been pushing ourselves hard for the ease-of-use of our software including the speed and accuracy. And I think you also have to keep in mind, service and support and training make all the difference in the world.

I’m in my 18th year in dental and I certainly could show you, Tycho, some of the scars on my back with technology and to be here as Dentsply Sirona in this particular category, I think we are so well positioned for the future and there is more opportunities. There is more that CEREC can do combining with Endo and implant as we move forward..

Okay.

Thanks, and then Uli on taxes?.

Yes, we are guiding to a 20% tax rate, this improvement versus the 20.8% we have for 2016, is purely based on the extended benefits of combining these two companies.

It does not take into account any tax changes and I will get to this for a moment, I should probably point out to you, many of you are aware that the accounting rules for the tax effects of share-based compensation has changed. And I think a number of companies have reported or guided to benefits from this respect.

The first thing I want to point out, economically, nothing has changed, the text treatment of share-based compensation is not changed, just the accounting for it. And we discussed with our auditors, there is a formidable discussion amongst the accounting profession, whether that should be discrete tax item i.e.

it would not be part of our adjusted EPS, just to get number or not, we have taken the conservative view and said okay it is probably going to be discrete, so we’ve not consider this in our rate. If this ends up being not a discrete item but they in the adjusted rate this should be a bit of tailwind to our rate.

These things are hard to estimate because under these rules we take the deduction for the excess value of option when people exercise over the fair value that we had amortized based on the black Charlotte [ph] at the time it was granted when people exercise. So it’s hard to predict when somebody will exercise.

So it will give more volatility to the rate. But, if this comes it is an upside to our rate, okay so much for existing legislation. Now, a word to the new legislation. We had a long meeting with our tax advisors about 10 days ago. And we went through the whole legislative landscape and looked at our situation and how it could impact us.

But frankly speaking, this situation is still very much in flux and evolving. I think, so far, neither the Trump administration nor the Senate Republican leadership have put their weight behind the House blueprint. There is still the Ryan and the Camps proposal and other things out there.

And I think it is really hard to predict what the legislative outcome will be at the end. I think if we look at the blueprint the way it is today and if that were enacted, we believe we would likely benefit from the lower rate, even though we are a net importer.

However, there are many uncertainties, including how other jurisdictions may respond and so on. One thing I want to point out to you is that I think all the proposals debated include a change to a territorial system. Which, then, would make it as easy to repatriate foreign profits, as if it is for us today with our foreign tax credits.

We have about $140 million of foreign tax credits, which enable us to today effectively repatriate our foreign earnings without additional tax, so this is of economic value for us today. If these proposals go through, it will become easier for everyone to repatriate and these foreign tax credits will in effect lose their economic benefit.

This is the summary. I hope this helps a bit. I couldn't give you much more, Tycho, but it is a long speech, but I hope it helps. I like them to know we have been conservative in an area or two..

Thanks, guys..

Okay. Thanks..

And we will take our next question from Steve Beuchaw with Morgan Stanley..

Hi, good morning and thanks for taking the questions. I wonder if we could jump off on the conversation, Jeff, that you introduced about trends in the U.S. consumables market. Encouraging to hear that you saw some improvement and I believe you mentioned that you saw some of that in January as well.

Could you just spend a minute on how you expect that segment of the market to evolve in 2017? And then I have a follow-up..

Yes, as you know, it has been a market that showed slow down and ebbs and flows, but certainly we see the market improving and we are encouraged with what we saw in December and frankly, into January on the retail side.

So on the consumables side, our chairside consumables really strengthened throughout the quarter and, we feel, grew faster than market, which is certainly a good sign for what we are capable of doing and we would expect that to continue throughout 2017.

As you think about that and what Uli mentioned about what we are also doing between the implant world tour, which will also be in the U.S., you also have DS world, which is shaping up with September in the back half of the year, as the market really improves, this will also help us accelerate our growth. We are built to be able to deal with that.

So I think that is a very positive takeaway that we are seeing in the U.S..

And certainly, we are going to be rolling out some exciting new products that the U.S. will benefit from at the IDS..

And then just a couple of clarification points.

One is, following up on the question about inventory, is there any reason why on a 12, 24-month horizon that the net amount of inventory in the channel would remain lower than where we saw it, let's say, in October of 2016? And then, real quick, could we just get what price mix was for 2016? Thanks so much..

Yes, go ahead..

The inventory, we have said this will have a net impact that would be a headwind as more than 1% for us, but we have also said that we believe the back half of the year, we will accelerate. So, we have tried to put some of that into our assumptions and also take a de-risking of that, but we don't want to get ahead of ourselves.

That’s been built in to the guidance that we gave today..

I think it is hard to predict what will happen beyond 2017. At the moment, we have given you our assumptions for 2017. The market we are serving with these inventories is about a $400 million revenue market for us, right? And we manufacture in Europe, we sell in the U.S., there is a six weeks lead time to bring the product here.

I think, I don't want to predict what will happen beyond 2017..

I mean, I would say that, beyond 2017, we should accelerate our growth. I mean, the adoption of our technologies is still strong. 3D seems to be the fastest-growing, our single-visit dentistry, CEREC, seems to get close to the tipping point. We are not getting our fair share on the DI side of this.

Clearly we have a headwind with 2D and intraoral, which I have mentioned on a number of calls, looks to be at the mature and replacement point. But I would also say we are the innovator in the marketplace and we have got some exciting innovations that will carry us on for 2018 and beyond, which will be exciting to dental professionals.

With regard to price, Steve, we raised prices in October, as usual. For equipment, there was a price rise in December, sorry, to start the year in January. But, equipment pricing has a lot more to do with new product introductions, and as I mentioned, this will be a record year for us at IDS in new products.

So I am exciting to see that will have an impact on us in 2017 and beyond..

Thanks, guys..

Thanks..

And we will hear next from John Kreger with William Blair..

Hi, thanks. Jeff, just to clarify the last answer, I think in the past, your consumable price trend has been around 1.5%, 2%.

Was that the price increase last October also?.

Yes, in the ballpark..

At general range..

Okay, thank you. And Jeff, maybe now that the Patterson relationship has been updated, can you just step back and review the channel strategy in general? I know Dentsply and Sirona had pretty different strategies about how they go to market.

Going forward, where will you go direct versus go through distribution or is that still in flux at this point?.

Yes, I think, appreciate that question, but we are redefining it. I mean, this is a area that, for example in Australia, we go direct with everything we do. In Japan, we go semi-direct. In the U.S., we have some of our product portfolio that goes direct, like endo, ortho and implant.

And certainly, we have institutional sales and DSO sales that we go through a distribution for some and to the military direct. So, it is across the board. We were actually pretty aligned in this, but the whole point is we have had an extraordinary relationship with Patterson.

What people seem to forget it is highly unusual to have 20-year exclusive on products and as I highlighted certainly with CEREC and Schick and then on everything for the Sirona in 2012. And keep in mind, we expect to continue to grow with Patterson and we have got a very strong and terrific relationship with Shine that is global in its nature.

And I know both organizations, when they think about their strategy, they think about it with Dentsply Sirona. So we have got a lot to do, but I want to highlight the fact that, right now, we have an exclusive on our Sirona products in the U.S.

with Patterson and the biggest focus that we need to do is we need to make sure that our organizations do our very best to sell during this period of time.

And focus is critical, having the right resources to be able to address the needs of the dental practitioner is what we are most concerned about, and we will take care of how we go about redefining our strategy later in the year and we will obviously explain that in detail.

But that is what we have taken into consideration when we gave guidance today..

Great, that is helpful. Thanks, Jeff..

Thank you..

We’ll hear next from Robert Jones with Goldman Sachs..

Great. Thanks for the question. I just wanted to ask on the guidance, if I adjust for the channel inventory reduction, which you guys talked about in 2016, it looks like internal growth would have been about 3%. Your 2017 guidance at the midpoint, it seems that you are calling for a little bit of growth, but similar levels to 2017 in 2017 to 2016.

I would have thought you'd seen an acceleration, given it is an IDS year and there should be some top-line synergies still.

Are there any other headwinds that you would flag as I think about the year-over-year growth that you are guiding to?.

No, you should get to a larger growth than – I mean, there is also, there is more inventory reduction next year than this year, right? We had….

Right, but the internal growth number is 2.5% to 4.5%, right?.

To take the midpoint, 3.5%, and this is against another headwind of, let's say, $50 million of inventory reductions, so you are closer to 4%, right?.

Okay..

Even higher, yes, I was going to say..

Yes..

Okay. And then I guess just….

I mean, Bob, we are expecting to accelerate in 2017 over last year’s growth..

Jeff, is that what you mean when you made the comment about guidance being de-risked?.

No. He said the best view of what we have today of our business. We took all the pros and cons into consideration and what we gave you would not be qualified as being conservative. There is one area, which I pointed out to you on the tax rate, where we have assumed that this will be a discrete item, which you might consider conservative.

The rest takes into account all the pros and cons. But of course, at the moment, we see the more challenging first half of the year and the second half of the year should really improve nicely..

Yes, okay, got it. And then I guess on the margin line, this might be a similar answer with the inventory issue, but it does look like you were calling for flattish margins in 2017. I would have thought with the synergies, there would have been a little bit more expansion.

Is that also as a result of having to kind of lap this inventory reduction issue?.

Now, on the margin side, I think what you see for the pro forma not pro forma for the 12 months of Dentsply and 10 months of SIRONA in 2017 is 21.8% operating margin.

I think we pointed out on our Q1 call already that, that was favorably impacted by the fact that we only consolidated one month of Sirona, with very strong sales and stable operating expense. If you look at our numbers on a 12-month and 12-months basis, the operating margin this year would have been 21.4%.

And what were guiding to shows improvement versus the 21.4% on a little bit of gliding scale depending on, how much we grow. But we’d be closer to the probably 21.8% you have seen now, right for the 10 and 12 months.

So operationally there is improvement in our operating margin in our guidance and this is still impacted heavily of course by the $50 million of sales we are forecasting or we are assuming we will lose in CAD/CAM and in imaging, it was again this $50 million more or less sales have no impact on our SG&A..

Okay. That’s helpful. Thank you. See you guys next week..

Thank you, Bob..

Thanks..

And we will hear next from Matt Miksic with UBS..

Hey, good morning. This is Vik Chopra in for Matt Miksic. Thanks for taking the questions. So I had two questions. Maybe, one, we could talk about prioritization of your capital deployment strategy in terms of M&A, share repurchases, dividends.

And the second question, I wanted to maybe shift gears to implant and maybe you could provide us with some color on your implant growth this quarter, expectations for 2017, and perhaps, geographically, whether it was stronger in the U.S. or the O-U.S. Thank you..

And the second I will turn to Chris to talk about implant. We’ve made this clear that part of our overall strategy is to be a consolidator. And I can tell you that the team is hard at work, we have got a nice pipeline that we are looking at.

Where we feel that we can not only purchase a business, but also bring it into the Dentsply Sirona infrastructure, and then, accelerate the growth with it or take out margins and I think 2017 will certainly, will be focused on that as well. We have also said that we will continue to buy back our shares. We have a buyback in place.

We believe in returning capital back to shareholders and this morning, we raised our dividend.

So I think that is all part of it, if you think a little bit more specifically, into the acquisition side of it, we have so many great franchises that we can play a role in, that you know sometimes it is actually, you know, taking on a company that has struggled to get its technology to market as well, and we’ve looked at that.

But of course, when we do that, it is always about what we can do in-house as opposed to outside of the house, we have a tradition of taking smaller companies and making them bigger, so I think that hasn't changed and it is a big part about what we expect to do at Dentsply Sirona.

Now implant is important because we made our big splash with MIS implant and really got us into the value segment, which is an exciting area, frankly one of the few areas that we didn’t participate. $1.5 billion in size and growing faster than our overall growth so that is exciting, and that’s accretive.

And also when you couple that with our digital, an important role within our revenue synergies and bundling, and Uli has mentioned about the world tour, we are geared up for what we can do in implant and I would like to pass that to Chris..

Sure. I appreciate that, Jeff and I would. Vik, I guess I would characterize the implant business. We were accelerating performance Q1 through Q3 sequentially, increasing momentum throughout most of the geographies.

We did give a little bit of background back in Q4 but I would say certainly for the year we look at it and our growth is in line with market.

We were ahead of market in Q3, so again we feel pretty solid in the context of the increasing momentum on this business, if you look at it from a geographic standpoint, we are strongest rest of world really led by far East China.

In particular, Japan we are getting some nice momentum, both Uli and Jeff has mentioned the world summit tour as we speak, that’s four different locations around the world.

As we speak we’ve got over 1000 dental professionals in Tokyo focused on understanding our latest innovations in terms of clinical implantology, on top of that a great opportunity for us to demonstrate the ties between our implants and the broader Dentsply Sirona portfolio including the digital portfolio.

So we are very excited about that, there’s a additional tour stops if you will later this year in the San Diego in May and Nice in June and Shanghai in November. So again there is al lot going on here, we are pleased with momentum, particularly improved momentum in the U.S. throughout the year.

And again, I think that we’re on our front foot as we enter 2017..

Thank you..

Thanks Vik..

And our next question will come from Matthew O’Brien with Piper Jaffray..

Good morning. Thanks for taking the questions. I think you have talked about this a little bit, but the internal growth for 2017, despite the headwinds that you're going to see on the destocking, was quite good in our view.

Can you just build up some of the assumptions, be it market improvement throughout 2017 in the U.S., the continued strength in Europe, rest of world, et cetera? Build us up to how you get to the, I think, you were saying when you exclude the impact of the destocking, something around 4.5% is the midpoint of the range.

So just, again, building that up and how we should think about that..

I mean there is two ways of doing it. One way is looking at what we think the dental market might grow and then build up to our growth, the other way is looking at what we have grown in 2016. I think that is probably for you guys the closer view, so if we take the growth we have 2.4% then there is the stocking so for arguments sake 2.93.

We have benefits of synergies and market share gains in tune of may be 0.5% to 1% incremental to what we did in 2016 because we also had market share gains and synergies in 2016. Then we think there is a bid of market acceleration and GDP growth that includes the benefit of IDS. I would put this into the dental market growth.

We probably benefit a bit more from this than others because we have a higher market share in the countries that are more impacted, Germany and the neighboring countries.

So you could assume this gives us between 0.5% and 1.5% additional growth and then the inventory reduction, 0.5% to 1% on top of what was done in 2016 and if you do the math, you should be well within our range..

Yes I would just make two comments again, look at what we’re able to accomplish in rest of world and areas when we’re able to really bring the power of the organization to our revenues synergies as a plus, the other thing that is in this guidance is an really nice balance of growth between consumables and technologies.

As we taken to consideration the inventory reduction, and as we’ve pointed out, we expect to grow faster in the back half of the year, and have some challenges, in the first half..

Fair enough. And then as the follow-up, on the gross margin side, it has been a metric that has been ticking lower. It is understandable. I am a little surprised it was lower in Q4, just given that there was the CEREC work done that we saw.

Although I know the treatment centers was pretty strong, but how should we think about that metric maybe over the first half of this year and then into the back half? I mean, is it, are we getting to the point now where we are getting pretty close to a trough level on that metric and it should start to build back up or is there potential for further downside pressure?.

I think one of the things that you need to keep in mind, the intraoral business, which has been an important stalwart for Sirona it’s slowing and it’s one of our best gross profit margins as it is.

Now, we will make up for that in other areas and one of the areas that we talked about that is very exciting for us, which we are starting to see some acceleration in the materials well you’re getting the growth from that, that does not come with the same growth, gross profit margin for us.

All in all, I think there is room to expand as we grow our business..

Q4 probably had relatively speaking fairly low margins..

All right thank you..

And we’ll hear next from Brandon Couillard with Jefferies..

Hey, thanks for squeezing me in. Just a two-part question for Uli.

If we factor the inventory destocking effects, should we be thinking about core growth in the first half more like flattish? And then secondly, any directional commentary you can give us around the operating cash flow or free cash flow conversion expectations for the year?.

Now I think on the first question Brandon, I think we gave you a lot of hints on the calendarization and we don’t want to get into the habits of giving quarterly guidance of building your quarterly models for you. So I think we gave enough hints on this. On cash flow, I mean we would expect a similar conversion than what we have seen this year.

Some – I don’t know, one of you always ask CapEx I forgot who it is so I’ll say that – I will give you this number too, probably in the range of $120 million to $240 million next year..

Great. Thanks..

Okay, thank you..

And we will hear next from Jason Bednar with Robert W. Baird..

Thanks for taking the questions, guys. Just a lot of my questions have been answered, here. But just wanted to come back to the improvements you saw in December and January. You mentioned a lot of those were on the chairside consumables side in the U.S. But it sounds like you did have some better growth on the orthodontic side as well.

But to that extent as well to the endodontic side too were just wondering if you can maybe compare some of the specialty areas to the general areas for December/January..

I would say Jason overall our specialty areas grew nicely. In the fourth quarter ortho again was we commented was above market or it continues to be above market that is a very competitive market.

With declining sale prices and again, we are really pleased with the traction and increased, unit volume we are getting with that, I commented earlier on implants, relative to Endo. Endo was particularly strong in Europe had a very, very nice quarter there.

So as we got into the quarter in terms of the just comment in terms of the sell through on the consumable business again looked-looked solid again. Stronger as we got into the quarter, so again we had December and then into January.

I think he commented as well, so again, overall I think some momentum and hopefully it gives you little bit of your color in terms of the three of the three specialties..

Yes, thanks, Chris. And, Jeff, just one more to come back to you. Just on IDS. Anything that you can give on what we can maybe expect from IDS? I know you don't like to use these calls as a form to preview new products, but just any color that you can provide or comments that you can give..

Yes, first of all I think I would invite the callers that are on this call to come, because it will really be the first time you get an opportunity to see Dentsply Sirona in its full force and what I mean by that, is you will be able to tangibly see how enabling technologies have an impact on procedural solutions.

And how they come together and it will give the dental professional the opportunity to who has a long-standing relationship with one or the other to see the benefits of having their full portfolio come together. So I think that will be a big part of this.

But we did talk about the fact that we are going to have 50 new products there and some really great surprises as well that I think we will have growth implications for years to come. That will again, show why Dentsply Sirona is so uniquely positioned to do certain innovations that no one else can.

And we have a saying that your next IDS needs to be your best IDS and I think this will not disappoint, we highlighted 3D Endo on the call because that is a clear differentiator, but we are going to have a number of them, and I think we are also going to show the overall dental market that if you thought you knew Dentsply Sirona think again.

We’ve got a lot in store..

Okay, great. Thanks Jeff. That’s great..

And our final question will come from David Shoten with Great Lakes Review..

All right, thanks for taking the question and I was just wondering about the savings and if you could give any detail or quantify what you seeing as you look at the payout to start hitting this year and over the next year..

I am sorry, David you will have to repeat yourself it faded in and out..

Sorry, I was asking about the procurement savings and how do you see that playing out over this year and the next year and, if you can, quantify it at all?.

Yes, I think procurement is a very important part of our cost savings, we are not going to go into the detail but that plays a role throughout our P&L on the gross profit side as well as the operating expenses and this is something that we’ll continually improve on and in important parts of our cost reduction synergies..

All right. Thank you..

Part of what helps fund all the investments we are making I told you about before..

Okay, thank you..

And that concludes today’s question-and-answer session. At this time, I will turn the conference back to Derek Leckow, Vice President of Investor Relations for closing remarks..

Well, thank you all for very much for joining us today. Enjoy your Presidents' Day weekend. We look forward to seeing many of you in Chicago next week and then, of course, in Cologne at the IDS. Have a good day..