Joshua Zable - DENTSPLY SIRONA, Inc. Jeffrey T. Slovin - DENTSPLY SIRONA, Inc. Ulrich Michel - DENTSPLY SIRONA, Inc. Christopher T. Clark - DENTSPLY SIRONA, Inc..

Brandon Couillard - Jefferies LLC Tycho W. Peterson - JPMorgan Securities LLC Steven J. Valiquette - Bank of America Merrill Lynch Erin Wilson Wright - Credit Suisse Securities (USA) LLC Robert Patrick Jones - Goldman Sachs & Co. LLC Vik Chopra - UBS Securities LLC Jonathan Block - Stifel, Nicolaus & Co., Inc. John C. Kreger - William Blair & Co.

LLC Steve C. Beuchaw - Morgan Stanley & Co. LLC David M. Stratton - Great Lakes Review Jason M. Bednar - Robert W. Baird & Co., Inc..

Good day, everyone, and welcome to the Dentsply Sirona Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. For opening remarks, I'll turn the conference over to Mr. Joshua Zable. Please go ahead, sir..

Thank you, and good morning, everyone. Welcome to our second quarter 2017 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 deck presentation. During today's conference call, we'll 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 and Form 10-Q lists some of our most important risk factors that could cause actual results to differ from our predictions.

And with that, I'll 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 second quarter 2017 conference call. Also, joining us on the call Chris Clark, our President and Chief Operating Officer. And I'm very happy to welcome back Uli Michel, Executive Vice President and Chief Financial Officer. Our second quarter results did not meet our expectations.

Ongoing equipment distribution challenges and certain transitory issues impacted performance. Our integration efforts, while necessary to transform our business, have not been fully implemented and are continuing to affect our execution.

Our decision to invest in additional sales and R&D efforts while reducing our earnings in the short term will set us up for faster growth in 2018 and beyond. We are focused on improving performance in the back half of the year, which I will discuss in more detail later. Second quarter internal sales declined 3.6%, driven by a decline in Technologies.

Consumables and Healthcare had internal growth of 2% this quarter. For the second quarter in a row, our Consumables business grew in each of our three regions, but still did not meet our expectations. Technologies declined by approximately 10% internal growth or $47 million.

Growth was unfavorably impacted by approximately $19 million or 400 basis points. This came as a result of a quarter-over-quarter changes in net equipment inventory levels at certain distributors. We sold less equipment into the channel at wholesale and the sell out into the market was significantly less than expected.

The transition in our go-to-market strategy is having a larger short-term impact than we anticipated. We expect this will continue to affect results through the third quarter, when we expect expanded distribution to benefit us in September. Turning to geographies. This quarter, Europe was our fastest growing region with internal growth of 2.3%.

Technologies' growth was unfavorably impacted by approximately $2 million or 50 basis points as a result of quarter-over-quarter changes in net equipment inventory. Despite the record interest in our Technologies at IDS, we did not convert our strong showing into the sales we expected.

It is possible that customers delayed purchase decisions, while evaluating new product launches. Over time, we believe the accelerated adoption of technology will benefit Dentsply Sirona as a market leader. Our IDS leads still may yet generate revenue, which should benefit us. Our lead sharing and cross targeting activities are delivering results.

Since the merger, we have put together some of the strongest consecutive quarters in Europe for years. Rest of World was down 1.8% on top of last year's 7.5% growth. Growth was impacted by a $3 million or 120 basis points change in net equipment inventory levels in Canada.

In June, we announced the new three-year distribution agreement with Henry Schein in Canada. This will expand our relationship to include CEREC and Schick. Patterson will continue to be an important and critical partner for us in Canada. Canada is one of the leading digital markets and highly interested in integrated solutions.

We believe that once this transition is complete, we should benefit from our expanded agreement. Our Rest of World region is well-positioned to be a growth driver in the short and long term. This quarter, we saw a rebound in Asia, particularly Japan, and saw strong growth in Russia.

Growth was impacted by Canada and the timing of project business in the Middle East. Our U.S. business declined 11.1% on an internal basis, driven by a larger decline in the Technologies.

Growth was unfavorably impacted by approximately $14 million or 380 basis points as a result of net distributor equipment inventory changes related to the transition in our distribution strategy. The inventory reduction was lower than expected due to a lower end-user sell-through.

We also sold initial stock to our additional distributor, which partially mitigated the impact this quarter. In Consumables, the U.S. consumables market is stable with modest growth. GAAP EPS was a loss of $0.0458, and the loss was mainly driven by an estimated $1.2 billion impairment charge for goodwill and other intangible assets.

Second quarter adjusted non-GAAP EPS came in at $0.65. This morning, we lowered our outlook for the year. Our results in the first half of the year have been below expectations. We have reflected this in our lower projections.

I'll now turn the call over to Uli who will review our second quarter financials, and discuss our outlook and the impairment charge in more detail.

Uli?.

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 second quarter, our reported revenue decreased $29.3 million to $992.7 million, down 2.9%.

Adjusted sales excluding precious metals declined 1% on a constant currency basis. Internal growth declined 3.6% excluding a 260 basis point favorable impact from net acquisitions.

By our assessment, overall sales were unfavorably impacted by approximately $90 million or 190 basis points as a result of net changes in equipment inventory levels at certain distributors in North America and Europe related to our transition in distribution strategy.

Based on the company's estimate, net inventory held by these distributors decreased by approximately $17 million during the current three month period compared to an increase of approximately $2 million in the same three months period in 2016. Foreign exchange movements were a headwind to revenue of 120 basis points.

Jeff already addressed revenue growth by geography and segment. We have provided reconciliation tables for every segment and region that will help you understand how the GAAP reported revenue and internal growth come together. U.S. GAAP gross profit was $544.2 million, up $17.3 million or 3.3% from $526.9 million in 2016.

Gross profit as a percentage of net sales excluding precious metal content increased by 300 basis points to 55.4% from 52.4% in the prior year.

As you can see on the non-GAAP reconciliation tables, the gross profit margin was negatively impacted by 340 basis points, mostly due to the effects of step-up amortization and other merger-related items as compared to 780 basis points last year. On an adjusted basis, gross profit margin was 58.8%, down 140 basis points for the quarter.

The majority of the decline is associated with the lower sales levels, particularly of higher margin equipment. Reported SG&A expense which includes R&D was $417.6 million, up $15.5 million or 3.9% versus last year. This equates to 42.5% of sales excluding precious metals, 250 basis points above prior year.

Non-GAAP items including amortization and other merger and business combination-related costs added 60 basis points. Adjusted for non-GAAP items, including amortization expense and other costs related to the merger, SG&A expense was $383.7 million or 39% of sales, excluding precious metals, representing an increase of 190 basis points.

Approximately, 80 basis points of which were driven by the lower revenues associated with the distributor inventory changes. The single largest driver of the remaining 110 basis points were increased professional service fees.

As a result of updating the estimates and assumptions following the recent changes in circumstances and in connection with the annual impairment test of goodwill, and the preparation of the financial statements for the three months ended June 30, 2017, the company determined that the goodwill associated with CAD/CAM, imaging and treatment center reporting units were impaired.

As a result, the company recorded goodwill impairment charge of $1.0929 billion. These reporting units were all within the Technologies segment.

The equipment reporting units' goodwill impairment charge was primarily driven by unfavorable changes in estimates and assumptions used to forecast discounted cash flows, including lower forecasted revenues and operating margin rates, which resulted in a lower fair value for these reporting units.

The forecasted revenues and operating margin rates were negatively impacted by recent unfavorable developments in the marketplace.

These developments included significantly lower retail sales for the fiscal quarter ended April 2017 reported by the company's exclusive North American equipment distributor in May 2017, significant acceleration of sales declines in the company's quarter ended June 30, 2017, and the execution of new distribution agreements with Patterson Companies, Inc.

and Henry Schein, Inc. in May and June 2017. The company also observed an increase in competition, unfavorable changes in the end-user business model, as well as changes in channels of distribution for the company and its competitors.

The estimates of discounted future cash flows include significant management assumptions such as revenue growth rate, operating margins, weighted average cost of capital, and future economic and market conditions affecting the dental and medical device industries.

Any changes to these assumptions and estimates could have a negative impact on the fair value of these reporting units and may result in further impairment. The goodwill impairment charge is not expected to result in future cash expenditures.

The company also assessed the annual impairment of indefinite-lived intangible assets as of April 30, 2017, which largely consists of acquired tradenames in conjunction with the annual impairment test of goodwill.

As a result of the annual impairment test of indefinite-lived intangible assets, the company recorded an impairment charge of $79.8 million for the three months ended June 30, 2017. The impaired indefinite-lived assets are tradenames and trademarks related to the CAD/CAM and imaging equipment reporting units.

The impairment charge was driven by a decline in forecasted sales. The assumptions and estimates used in determining the fair value of the indefinite-lived intangible assets contain uncertainties and any changes to these assumptions and estimates could have a negative impact and result in future impairment.

In conjunction with the impairment test, the company utilized its best estimate of future revenue growth and operating margin rates as of April 30, 2017. These estimates could vary significantly in the future which may result in an impairment charge at that time.

Restructuring and other costs were $81.7 million, up significantly from $3.6 million last year, largely driven by the $79.8 million impairment charge for indefinite-lived intangible assets. In total, GAAP operating loss was $1.05 billion, down from $121.2 million last year.

Excluding the non-GAAP items set forth in our non-GAAP financial measures, adjusted operating margin was 19.8%, down 330 basis points compared to 23.1% last year. As we discussed, on an adjusted basis, the gross profit margin rate was down 140 basis points with unfavorable impact from lower equipment sales.

In addition to this headwind, adjusted operating margins for the current year were impacted by higher operating expense rates by 190 basis points as discussed a moment ago. Net interest expense increased by $700,000 in the current quarter compared to the prior year.

Other income and expense decreased by $19.3 million as compared to the prior year quarter, primarily driven by the change in foreign currency as the prior year period benefited significantly from the effects of Brexit. For the three months ended June 30, 2017, we recorded a U.S.

GAAP income tax benefit of $14.5 million as compared to expense of $17.9 million in the prior year period.

The current year period includes net benefits of $25.7 million in discrete items, including $23.5 million related to the impairment of indefinite lived intangible assets, as well as $4.2 million of discrete excess tax benefits related to employee share-based compensation.

On an adjusted basis which, per our policy, excludes the discrete tax items, as well as the tax impact of non-GAAP items, tax as an expense was $29 million this year versus an expense of $54 million last year.

On an annual basis, we now estimate our adjusted effective tax rate to be 17.5%, resulting in 16.2% for the quarter compared to 23% in the second quarter last year and 20.8% for the full year 2016. Our lower tax rate is a benefit resulting from the complementary tax attributes of the merged companies. Due to U.S.

GAAP, net income attributable to Dentsply Sirona was a loss of $1.05 billion, down from income of $105.4 million last year. Second quarter 2017 GAAP EPS was a loss of $4.58 compared to $0.44 diluted GAAP EPS earnings in the prior year. The GAAP EPS loss was mainly driven by a loss of $5.05 as a result of the noncash impairment charges.

Adjusted non-GAAP net income declined 16.7% to $150.7 million. This decline in net income reflects lower revenue largely associated with the transition of our equipment distribution in North America. Adjusted earnings per diluted share was $0.65 compared to $0.76 last year.

The $0.11 decline in EPS was mainly driven by the effect of the distributor equipment inventory changes and FX. All other effects offset each other, including benefits in reduction of tax rate, acquisitions and share count, offsetting the decline in our business performance.

For a reconciliation of GAAP EPS to non-GAAP adjusted EPS, please see our earnings press release. I will discuss elements of cash flow statement this quarter highlighting the key drivers. Cash flow from operating activities during the quarter was $126.1 million.

Cash used in investing activities was $150.8 million, of which capital expenditures were $33.7 million for the quarter and $116.6 million related to acquisitions and equity investments. We now expect CapEx for the year to be in the range of $130 million to $150 million.

During the quarter, we paid $73.6 million for share repurchases and paid $20.1 million in dividends. Now, turning to guidance. We are updating our guidance for fiscal 2017. We now expect adjusted non-GAAP EPS in the range of $2.65 to $2.75. Our guidance includes the following assumptions.

Full-year constant currency growth rates to range from 2.5% to 3.5%. This includes approximately 200 basis points of net benefit from acquisitions, implying internal growth of 0.5% up to 1.5%. This assumes internal growth of 5% to 7% for the second half of the year.

In the second half of the year, we expect channel inventory changes to be similar to last year. With the year-on-year comparison being a slight headwind in the third quarter and a slight help in the fourth quarter. For the last six months of the year, we anticipate essentially flat year-on-year impact from channel inventories overall.

At current exchange rates, this translates to reported revenues excluding precious metals of $3.95 billion to $3.99 billion. Our lower outlook reflects about $100 million in lower internal sales growth as compared to our previous assumptions with the largest single driver being our North American equipment business.

We now expect our adjusted effective tax rate to be 17.5% for the full year. The lower tax rate reflects both, the benefits of the complementary tax attributes of the merged companies, our lower projected income and our particular geographic mix this year.

Our EPS range implies a full year diluted share count of approximately 231 million to 233 million shares versus 222 million shares in 2016. This reflects approximately $0.09 headwind from share count. We anticipate FX headwinds of $0.10 to $0.12 for 2017.

Based on the dynamics I've explained, we believe that the fourth quarter should be our fastest growing quarter in the year. I will now turn the call back to Jeff.

Jeff?.

Thanks, Uli, for your detailed explanations. As you all know, the entire management team and I take guidance very seriously. We expected the first half of the year to be challenging, but it has been more difficult than anticipated. We are taking the necessary actions to address our performance. We expect improvement in the back half of the year.

We believe the issues that have impacted us this year are transitory in nature. I'd like to walk you through them and help you understand why I believe we will exit the year with momentum going into 2018. This year, we have been impacted by the transition of expanding distribution of equipment in North America.

As you know, we expected a headwind to our growth for the planned inventory reduction with distributors. While we expected some reaction from the market, we did not expect it to this extent. Doctors are waiting for distribution to open to evaluate their options. This is stalling decision-making and freezing the market for our high-tech equipment.

At the same time, Patterson, our exclusive partner, is going through a number of changes themselves. They're enlarging their product portfolio and they are still coping with the effects of their sales force reduction last summer. Patterson has stated publicly that they are committed to reinvesting in additional sales and marketing resources.

This is expected to help drive adoption of technologies in the marketplace which would directly benefit us. Our lower-than-expected retail performance of high-tech equipment in North America accounts for a significant portion of our lowered outlook. We believe that this should ease in September when our expanded distribution starts.

We expect this to be a catalyst for doctors to resume normal purchasing activities. We are also expecting a record turnout at Dentsply Sirona World in the middle of September. As awareness and interest grows from multiple distributors, we would expect growth to accelerate. Our Rest of World region should be well-positioned to be a growth driver for us.

We saw sequential improvement this quarter, but year-to-date delays in projects and extensive country integration activities have weighed on results. We continue to expect to grow in this region, but are less optimistic with our forecast given what we've seen to-date.

We expect to have the majority of our country formation activities completed in this region by year-end, allowing for complete focus on the business again. As I look ahead, I am confident in a bright future for Dentsply Sirona. The majority of our businesses are growing today.

The ones that are dragging us down are having an oversized impact on our results. We believe this will turn in the second half. Our first half earnings have been depressed by lower sales of high-margin equipment and higher expense levels.

Our decision to invest in long-term growth drivers like R&D, sales and clinical education more than offsetting G&A savings. In the back half of the year, we expect earnings growth as high-tech equipment returns to growth and investments made begin to deliver returns.

In addition, we are taking the necessary actions to improve our operating performance and reducing costs. Our transformation is founded on multiple pillars that will drive faster sales and earnings growth.

These have been guiding principles for me through my 17 years of dental, and I will be relentless in pursuing them to unlock the value of our organization. First, we have not and will not sacrifice commitment to being the innovator in the industry. We will continue to introduce new products and solutions unique to Dentsply Sirona.

These new products will benefit us for years to come. Second, we will always act with uncompromising integrity, but we will compete with unbridled enthusiasm. Our industry has taken notice of our ability to deliver solutions and is aggressively advertising their own.

We will aggressively highlight the features and benefits of our systems, products, and solutions to grow faster than market. Third, I will hold our organization accountable for our commitments. When I started my career in dental, I was tasked with a turnaround. At Sirona, I was asked to make a great company even better.

At Dentsply Sirona, we are dealing with our biggest challenge today, our integration and alignment. As we head into the third year of our plan, we will go from integration to transformation and reap the benefits of all of our hard work.

I've always believed in the power of our team working together to accomplish something great, and our vision is clear. We are focused on improving growth through delivering innovative dental solutions to improve oral health worldwide.

We have over 600,000 dental professionals around the globe using our products daily and yet we have less than 20% share of the market. Our priority is to improve growth and ensuring that our synergies drop to the bottom line in the back half of the year, exiting the year with momentum going into 2018.

Our comparisons are much easier in the second half of the year. You'll recall last year, we grew much faster in the first half of the year than the second half. In September, we believe we'll begin to benefit from the expanded distribution in both the U.S. and Canada later this quarter. This should reenergize sales of our high-tech equipment.

In the U.S., our consumables retail sellout is growing faster than our results this quarter. This should drive accelerating demand of our consumables. The new products and solutions introduced at IDS will continue to roll out globally.

Top line growth remains at the forefront of our priorities and strategies, but we also remain committed to driving leverage through our P&L and driving increased profitability. In the second half of the year, we expect adjusted EPS to grow double digits, translating into over $600 million in adjusted net income for the year.

Our balance sheet remains strong. Our strategy continues to be return capital to our shareholders as well as pursuing strategic acquisitions. I'd like to thank our customers for their loyal support, trust and enthusiasm for Dentsply Sirona.

I want to thank our distribution partners around the globe, who have helped deliver our unique solutions to the marketplace. I also want to thank our employees and investors. We are executing on a three-year plan, which requires hard work and patience.

I am confident that we will create significant value for all of you as we change dentistry for the better. Thank you. We will now address your questions. Operator, please proceed..

We'll take our first question today from Brandon Couillard with Jefferies..

Thanks. Good morning..

Good morning..

Good morning, Brandon..

Uli, I got to start with you. In terms of the guidance for the year. Just so I – I think I understand your comments correctly. So, you now anticipate the inventory drawdown on a net basis to be flat for the year versus the prior $50 million to $60 million view.

Is that correct?.

No. This is not correct. Our view for the full year has not changed much. I mean, we told you I think on the first call we had this year in February that we would expect about a $50 million drawdown for the full year.

And then when we talked again in – after the Q1 call, I think, we said we would expect for the remainder of the year, after the events in Q1 another $10 million to $20 million drawdown.

And now, we still see the full year drawdown somewhere in the range of $40 million to $50 million, maybe a little bit lower, at the lower end of this $40 million to $50 million. But this means, after we've gotten down $19 million in Q2, that there is less to go for the remainder of the year.

So, the net impact is probably for Q2 to Q4 altogether about $10 million what we see now versus the $10 million to $20 million we told you before. And for the full year, maybe closer to $40 million rather than the $50 million. But again, these are estimates that we make, and said we build into our forecast and assumptions.

And it includes our assumption of a lower sell-through basically which we have observed mostly in Q2 now. So, the reductions in the channel have not gone as fast as we had anticipated before. And we do think that maybe they will not go quite as deep this year as we had previously anticipated.

But that could change if our dealers have a good event in Vegas, right? With our DS World. They could draw down more. So, this is just our assumption. But it hasn't changed much, Brandon, versus what we told you from the beginning, it's this $10 million swing.

Does that help?.

Yeah. Understood. Yeah. That's very helpful. Then one for you, Jeff. Curious if you're making any changes internally with the management team, would be curious to hear how turnover has been, if there's been any other significant changes on the executive team or elsewhere.

And, for example Derek Leckow has been a fixture on the Dentsply calls for 20 years, where did he go now?.

Yeah. Okay. We are making changes on the team. We're also simplifying the business. Derek is actually working with our integration management office and supporting that, which is very important to our organization specifically, but I'm absolutely committed to simplifying our organization. We've created a chief commercial officer.

We've looked at ways of empowering our teams better. We're also setting up our organization into three segments. From a standpoint of turnover, look, we're setting high expectations.

People understand that, but I do not see it from a standpoint of our senior team to-date a significant change other than the ones that we've announced to you, and we fully expect to put a premium on leadership and execution as we move forward..

Very good. Thank you..

Thanks, Brandon..

We'll take our next question from Tycho Peterson with JPMorgan..

Hey, thanks. Jeff, I want to start with the impairment. I'm trying to understand why the longer term forecast related to CAD/CAM and other Sirona product lines are moving lower here if these issues are really transitory.

So, has anything meaningfully changed in your forecast for market demand and/or competitive dynamics?.

First of all, and I'd also like to make sure Uli is able to comment. But you have to understand, Tycho, we haven't broken out which segments have been affected in the order of magnitude of that.

Certainly, the aspect of what's going on in North America has had impact on CAD/CAM in the short term, and you know that the models are affected by the time value of that. We've also mentioned about competition, and specifically, we've seen a higher interest in digital impression only.

This can be transitory in nature as we fundamentally believe that our integrated chair side solution is where we're going in the future. I do believe that we have chosen the right strategy for our go-to-market.

Uli?.

Yeah. I mean, the – the fact that we – I can't really say much more than what is said in my prepared remarks. We do these tests on a quarterly basis. We did our annual test this time.

We considered all the recent changes that happened over the last weeks and months in our marketplace, and we do these assessments based on our best assessment, best knowledge and belief; as of today, what we see and what we know today and we have incorporated all of these in this assessment.

Some of these aspects might turn out to be transitory in nature, and we have made our adjustments and assessments on how we think things would evolve. Some of them are maybe a bit more permanent. So, we've considered all this to the best of our knowledge and belief. And I don't think, this is – I think, this is all I can say at this point..

Tycho, the other thing I want to really highlight is the guidance that we lowered today also reflects 5% to 7% growth in the back half of the year, which we think is pretty good. However, given our first half results, the implications on the full year are clear..

Okay. And then, for the follow-up, just sticking with the equipment theme, you called out the lack of an IDS tailwind. I'm just kind of curious on that dynamic.

Has the kind of post-IDS perception to opening up CEREC not lived up to your own expectations and are there things maybe you would look to do differently to maybe offset some of these competitive pressures that you're flagging?.

Well – and, Chris, I'm going to hand this over to you in a second, I would say a couple of things from the standpoint of IDS. Our early indications were pretty clear that it was an extraordinary IDS for us given the traffic and the interest.

And, frankly, when we compare it to last year – sorry, 2015, the vouchers and interest we received were double-digit more than in the past. However, the conversion ratio has been down, and we don't know if it's going to stay lower or this is just slower. And this could track to as much as $10 million lighter, which is not insignificant.

But the power of what we were able to show at the IDS from a standpoint of Dentsply Sirona was strong.

The issue of opening up our CEREC certainly hasn't paid the dividends that we thought it might, which tells us there's something about the ecosystem we have, but Chris, please you can talk a little bit about our CAD/CAM in competition?.

Thanks, Jeff. Tycho, I guess, I would just echo Jeff's thoughts in the context or comments in the context that obviously relatively to full chairside CAD/CAM, the CEREC system is extremely well-positioned. There are some new options there competitively, folks may be taking a little bit of time to compare that.

We do believe that, as they do that and they carefully consider the options, frankly, we believe we've got a significant advantage on a number of fronts, and we think we'll win more than our fair share here.

Relative to digital impression, that obviously, the Omnicam, with the addition of CEREC open, is extremely well positioned we believe in that market. There's obviously some training, if you will, for our people, as well as for our distributor partners in the context of education of DI really as a distinct segment, if you will.

And obviously, if someone has the opportunity to sell all the way up to a full chairside system, they're going to try to do that. So, I think that more than anything else, for us, it's balancing, if you will, these two distinct segments through our sales organization, also through distributors.

But I do think, we're well positioned – very well-positioned in both..

The only other thing I would say is keep in mind the number of these competitive products have not launched yet. So, it's going to be very interesting, and I believe we'll get our fair share as we go head to head against these products, and not just marketing material..

Okay. Thank you..

Thanks, Tycho..

We'll take our next question from Steven Valiquette with Bank of America..

Hey. Thanks. Good morning, Jeff and Uli. Thanks for taking my question..

Good morning, Steven..

So, just – let's drill a little bit deeper on the U.S. internal sales decline. It is helpful that you called out the $14 million destocking, but then you also cited that lower equipment sales to end users as a result of the transition challenges of what have been your exclusive distributor. That's the part I want to drill down on for a moment.

And I guess you're likely referring to that distributor's U.S. salesforce transition. I'm just trying to figure out how you kind of assess what's really going on there with that salesforce transition issue versus the possibility that it might just be a general U.S.

dental market slowdown, which I think you're saying that you don't see it as far as a general slowdown.

But how do we really better understand what's really going on with this "transition" challenge at your exclusive distributor separate from the destocking $14 million that you called out?.

Right. So, I mean, in general, the dental market we see is stable. We're not ready to call out a real improvement to that and feel good about what we're doing on the consumable side and know we can do more together with that. But as you look at what's going on this year for us in North America, certainly reducing the inventory has been a priority.

The – we are absolutely convinced that having less sales people out there in the marketplace does have an effect on your ability to sell our breadth of products.

And while we are fully committed to our partners in North America, we recognize that with the announcement of a new distribution model that dentists are waiting to see what happens to pricing and offering on that, and what certain distributors may use as bundles on that.

We think the offerings we have on all of our technologies are compelling, and there's no reason to wait on that. But as you heard, we would have expected a stronger sales in this quarter. If we thought that we were not going to have that, we would have taken different actions.

And so as we look at that, Steve, it's clear to us that there is a strong interest in our Dentsply Sirona World by both distributors. We're going to have record attendance and prospects there. And the proof again for all of this being transitory is our ability to execute at a high level.

And I'm confident in what we have in store at Dentsply Sirona World and the training that our organization is doing with our distributors, and the fact that we are also adding additional resources to complement our distributors in the back half of the year, and you'll see more of that, frankly, play out in the fourth quarter..

Okay. That's helpful color. Then just a quick one-liner follow-up just on the U.S. dental consumables growth. I mean, is there any chance that you actually have a number for us and the internal dental consumables growth in the U.S. just for the quarter? I think that became a bit more topical after some of the other dental company earnings this quarter.

If you get any sort of number around that, it might be useful..

Sure. That is a fair point, and would love to get Chris involved..

Yeah. I mean, we saw very similar to what we saw in previous quarters on a days-adjusted basis. Actually, in terms of sell-through, look very, very similar. So, we've not seen it as a trend up or a trend down per se. I'd put it in the low-single-digit range..

Okay. Great. Thanks..

Thank you, Steve..

We'll take our next question from Erin Wright with Credit Suisse..

Great. I'm curious how confident you are in kind of the distributor buy-in, as well as destock embedded in your guidance at this point.

I guess, how much should we think of this as a more of a moving target? Just curious if we should anticipate meaningful changes at all or do you think that you have better visibility now?.

Well, I would tell you we always give our best estimate of where it is based on the dynamics. But, Uli, if you want to give a little bit more color..

I mean, it is a bit of a wild card, Erin, at the moment. We see Patterson's performance, and I think anybody who listened to their earnings call in May sees that it's not really stellar with our products, right? And that's what we're seeing at the moment. There is a lot of excitement, I think, on the Henry Schein side.

I think, they also expressed it on their call the other day. And as Jeff said, registration for DS World is at a very high level. So, this is good. But it still needs to be executed. I think, Patterson has to improve their performance versus where they are now. And then....

Uli, I just want to clarify....

...

(47:45) to execute, right?.

Patterson is absolutely committed to Dentsply Sirona and the proposition that we bring to the dental office. They're doing an extraordinary job to get ready for Dentsply Sirona World as well. So, both organizations are going to be bringing a lot of prospects, and I think, it's going to be a record event.

And, of course, for Dentsply Sirona to succeed and go where we want to be, we want both of our distributors to do extraordinarily well..

Okay. Great. And then, in Rest of World, you mentioned some stronger consumables trend. Can you point to maybe where there may have been pockets of growth across specific geographies that you point to? Thanks..

You're talking consumables, Erin or....

Consumables. Yes..

Consumables. Yeah.

Chris, do you want to?.

Yeah. I mean, as we look to the Rest of the World, we were stronger in the quarter in Japan than we had been. So, I think that we felt better about that. As we looked at Latin America, we've got some restructuring efforts going on there, but we were pleased generally with the growth we saw coming through there.

I think, we've got a number of countries where we're bringing the organizations together. So, we got a fair amount of, I would say, organizational noise in many of these regions that we're working through. But I would say, again, on the consumable side, we felt pretty good. We felt particularly good as well in Russia.

So, Russia actually also look very, very strong in that region..

Yeah..

Great. Thank you..

Yes..

We'll take our next question from Robert Jones with Goldman Sachs..

Great. Thanks for the question. I guess just to go back. I feel like it's still a little bit of mixed messaging, Jeff, on the Sirona portfolio and your expectations.

On the one hand, you are taking this impairment charge, and if I'm hearing you guys correctly it sounds like that's more of a permanent change to the growth expectations around some of the products within the Sirona portfolio.

But then on the other hand, you're saying when distribution opens up, you feel like growth can return to more normal levels and that maybe it's more of an execution issue. So, just hoping maybe you could square those things a little bit better for us.

Is it in fact more of a permanent change to the outlook or is this something you see as kind of fixable as we get through the back half?.

Look, the – we took the best information that we had when updating our – look at our goodwill. And Uli, I think, did a terrific job talking about all of those aspects of it. So, this is as we see it today, and our job as a management team is to make sure our organization executes at the highest level.

And of course, we, being the innovator, is a big deal for that and how the acceptance of our new products and what we're able to do. And, of course, we take that into consideration as well. You don't have a situation after you have an impairment to then change that to reflect what happens years from now on this.

And so, we as an executive team took everything into consideration that we've outlined to the best of our ability..

Okay. Got it. And then I guess just looking at the guidance reduction for the year, when we adjust for the changes in FX and tax, it looks like about half of the change might be coming from the change in revenue if I'm thinking about that close to correct.

Is there any change to your underlying expectations for margins in the back half in the revised guidance or is it just maybe more delevering on the lower volume? Just curious if anything had changed around the margin side and maybe synergy expectations..

There is no big change versus our previous assumptions or views on the second half in terms of margins.

If you look at the guidance we gave, I think I said in the prepared remarks that internal growth for the full year is about $100 million lower than what we assumed when we talked to you last time, and the lion's share of this $100 million reduction is in the Technologies segment.

As you know, the Technologies segment has fairly high profit margins for us. Within the Technologies segment, the single biggest driver is North America and the CAD/CAM and imaging product lines, so they have an impact.

And if you do the math on this, you will see that the $100 million, it's not hard to see a $0.20 to $0.25 negative impact from this $20 million lower revenues. And then you have some offsets from the updated tax rate we mentioned before. And a few other items as cost savings we're implementing in things like this.

So, this is how you get to the – at the end $0.15 lower guidance at the midpoint..

Perfect. Thanks, Uli. Thanks for that bridge. I appreciate it..

You're welcome..

Take care, Bob..

We'll take our next question from Matt Miksic with UBS..

Hey. Good morning, guys. This is Vik Chopra in for Matt. Thanks for taking the question. I just want to get an update on your synergy targets. Can you give us an ideas as to where you are year-to-date, and what we should expect for the back half of the year and heading into 2018? Thanks..

Yeah. Thanks, Vik. Look, we're still confident that we're uniquely positioned to drive these synergies. I think, it's important that you understand that it's a three-year plan that we have. And we've got revenue synergies, some 150 of these in action.

And they are absolutely gaining traction from the standpoint of CEREC, consumables to what we've been able to do with the Midwest, with our electric made in Germany. By the way, Midwest is the number one brand for instruments here, and what we're doing with our implants and X-ray.

These are absolutely having an impact, but you also have to take into consideration that we're also investing for the future that – and that has offset a effect for us. But I think these synergies also come at the cost sometimes of our base business as we run to look for certain bundles.

In the end, it's going to be all about the way we go to market as Dentsply Sirona. So, I believe, we're uniquely positioned there in the integration. And the cost synergies, the country formations we're in the thick of it, and we're doing all the right things. We are lowering our G&A, but as we said, there's offset to that from selling and R&D.

But keep in mind we have significant tax synergies that we've discussed that are having an impact and will continue to..

Okay. Great. Thanks for the color. And just one more follow-up. You called out Europe as being your fastest-growing region this year, any additional color on that, specifically country-wise or by region? Thank you..

Sure. First of all, I think, it's important to talk about Germany. And while Germany had very strong growth, much stronger than GDP plus or minus, we had higher expectations. And I think I talked a little bit earlier about $10 million that we thought that would be there, but strong growth there.

Southern Europe is certainly showing us better growth than Northern Europe. It continues to be a mixed bag. I have to point out that the UK is feeling some real effects and we saw declines there. We've mentioned Brexit before, we're seeing some of the effect to that. France was down a bit for us.

But, in general, very pleased to see what we're doing with Consumables and also what synergies we're able to leverage in Europe. And as I said, that the Consumables were growing the fastest they have in years, which is a great sign for our organization. I'm very pleased with the team. I think we lose sight some of the time though.

We have 16,000 employees at Dentsply Sirona. And certainly, a significant number in Europe who get up every day trying to make a difference, and I'm proud of what they've been able to do with a lot of the uncertainty in Europe. And really power through that and go after making a difference for dental practitioners in Europe and patients.

Vik? Take the next question then..

We'll take our next question from Jon Block with Stifel..

Great. Thanks and good morning. I'll limit myself to two.

So, first one, Jeff, just maybe in the context of a lowered guidance in conjunction with the impairment, maybe you can provide just some high-level thoughts on your belief that this entity is a real, call it, mid-single-digit long-term grower once you get this organization where you wanted and you get the right distribution in place, and then I got to a follow-up.

Thanks..

Yeah. Let's start with my confidence in Dentsply Sirona and what we're able to do. And it begins with highlighting the fact that every day some 600,000-plus dental professionals use our products. And we are working hard to come up and continue to innovate and that is a principle that will not change.

We have exceptional group of people throughout our organization. And talent matters to this and we're holding ourselves to a high standard.

But, Jon, I have to tell you the first half did not meet where we expect it to go, and the second half, we're talking about this mid-single-digit growth, 5% to 7%, with being able to leverage that to double-digit growth. Our organization knows the expectations that we have and what the investors have for us.

And the majority of our businesses are growing, but when you have a challenge in North America and you have what we believe we'll be able to work through in issues with CAD/CAM and imaging that have strong gross profit profiles, this creates the headwinds for us.

But we're fortunate to be in an extraordinary industry with exceptional customers, suppliers, and partners in distribution. And I do not see any reason when Dentsply Sirona operates together, united, there's nothing that can stop us from reaching our objectives.

Integrations are challenging especially when you bring two organizations that are leaders together. And we're in the thick of the integration and I've always said that it's about what we're able to do during this period to transform ourselves after we come out of this to make the most of what we're capable of.

And that's why we've made it clear, it's a three-year plan, and it's back-end loaded.

And we're not backing away from that, and that's why I'm doing everything I can to simplify the organization, to bring clarity to our messages, to hold the team accountable, and to make sure that we have the processes and plans in place to make this clear so we can execute on our objectives..

Okay. Okay. Very helpful. Very helpful. And then maybe, a little bit near term or even the new internal growth rate of 1% at the midpoint versus the prior of 3.5%, so it seems like, Uli, the net inventory impact for the year did not really change too much, maybe only the timing. So, I just want to be perfectly clear here.

Really, the lowering of the internal for the year that is vast majority specific to the retail performance of North American technology, and maybe a little bit that falls to Rest of World and/or Consumables? Thanks, guys..

You got it right, Jon. Right. This inventory is even as we said maybe a little bit positive (1:02:50) lower, $10 million less. So, the $100 million reduction in internal growth, the biggest part is in the Technologies segment. There is only a little contribution from Consumables.

Within Technologies segment, the biggest driver is equipment in North America. You got it right, Jon..

We'll take our next question from John Kreger with William Blair..

Hi. Thanks very much. Question for Chris actually.

Can you just clarify – I think earlier on the call, there was some suggestion that maybe the underlying dental market had softened a little bit particularly in the U.S., but then a few minutes ago, it seemed like you were saying stable, so just what are you saying for sort of end-market dynamics or are they getting a little worse or not?.

Yeah. John, on the Consumables side, we have not seen a softening in terms of sell-through. So, no, I wouldn't say that we've seen any material change on a days adjusted basis in terms of sell-through that would indicate the change in the market. We see it very constant at this point..

John, I think, you got to go with the word stable. Now, would we like that to be improving? Yes, we can't say it at this point..

Got it. Thanks. And, Jeff, a quick follow-up for you. You said you're committed to innovation.

Can you just expand a bit on that? Stepping back, where do you see the biggest opportunities for real kind of breakthrough, kind of wow-factor product launches over the next few years?.

Well, for those at Danaher and other places, look, we've got a lot of the big bets that we've – a company can decide to back away from the big bets, and we could make our short-term earnings look terrific. That's not what this company is about, it's about bringing out the best products and solutions.

And also understanding that you need to be able to act with the intentions of understanding your markets and different market expectations. And I think when we talk about our dental solutions, we're talking about root to crown, we're talking about the power of what we can do with our imaging and our CAD/CAM.

But the R&D, none of these products are six-month products. They have long legs to them. I'm so pleased that we're spending a lot of time with our folks in prosthetics because that's the backbone of our materials, and they don't get a lot of credit.

It shows up in restorative or you hear about it in CEREC materials, but they're doing some things that are going to be groundbreaking for us. In Ortho, MTM is at a small level, but we all know we're the empower of clear aligners. We also know what we have from an install base of our CEREC and our Ortho, and our innovations with regard to software.

Remember, embedded in this company is a technology company, an equipment company, consumable company, and a software company. And each one of those has opportunities to grow. But I will tell you this, John, and I think, this is the takeaway.

Not all of our R&D projects are big bets, and we are making it crystal clear that we are going to fund some areas more than others, and that's the important distinction..

Very helpful. Thank you..

We'll take our next question from Steve Beuchaw with Morgan Stanley..

Hi. Good morning. I want to come back to the topic that Jon Block raised. I think it's really the key that we're trying to get to here is how do we walk away from this conversation with a view that the growth goes back to mid-single-digit growth? You've come at that from a number of different directions.

But I fear that one of the things people are going to come away asking is, well, what over the last six months or nine months, has changed in the way the company thinks about commercial strategy? We've been hearing for some time that there's an anticipated evolution in the commercial strategy.

I think, we all understand what's going on with Schein moving in the right direction. Patterson they have their own issues. But I have to think that you guys have learned a lot over the last six months to nine months, and you've refined your approach.

And so, as we try to build our confidence in the 2018 outlook, it would be great to hear you reflect through, Jeff and Chris, how you think about addressing the market and what is really new after the experience of the last three quarters?.

Well, I think, Steve, let's start and be crystal clear. We're talking about dealing with the realities of what's happened in our second quarter, and reflecting that because that's also where we looked at our impairment. Keep in mind that we signed our new exclusive agreements with Patterson and Schein, May 8.

And also, we've also looked at what's transpired in the business in North America. And certainly, we've done our best to highlight the implications of when you're exclusive and you have less sales reps out there, what has happened. We would have expected April and during our exclusive period to have higher sales than we were able to.

We talked about the end users there. And then, when you talk about the mid-level growth, again, I'll tell you back half of the year implies 5% to 7% growth. And we've said in our remarks that this is creating momentum into 2018. I understand and I'm very sympathetic to the desire for us to give 2018 guidance today. But we don't give long-term guidance.

We've said on multiple occasions that we're fundamentally committed to growing faster than the market that has not changed in our belief. And fundamentally as the CEO, that's my job to bring that out. And Chris, and Uli and our management team is committed to that.

So, I understand the desire, we're not at this point, changing our guidance to give 2018 in August. But I hear you and appreciate that.

Chris, would you like to give some additional points?.

I think, you hit it well, I mean, obviously, there's a lot of factors here. We've discussed those. We've got all the integration going on. There's a lot of effort in a lot of places here. This organization is coming together in terms of good collaboration in the field, that's a positive.

But there's obviously a focus cost in the near term in terms of some opportunity costs on this business focused through that. And again, I think, the other factors have generally been discussed..

Okay. So, then my one follow-up, and it's another sort of commercial and channel strategy question, is if we exclude Patterson, if we exclude Henry Schein, and we look at the rest of the distribution network globally for Dentsply Sirona, how has market share evolved for you over the last two quarters? Then I'll get back in queue. Thanks..

I don't think we have the data. (01:11:50) I mean, we have so many distributors worldwide. It's really hard to gather. And once you leave the Patterson and Schein, the size gets fairly small fairly quickly, right? So, at least, on a global basis, they tend to be more national or at best regional dealers. And we don't have the data at hand, Steve.

I can't tell you..

But I am confident that with our talented sales and service organization, and nobody does clinical education better than we do. So, I would be very – and we do it on a global level all of this. Nobody has more reps than we do selling this or focused on clinical education and training.

So, I would believe that that would play even a bigger role outside of Patterson and Henry Schein..

We'll take our next question from David Stratton with Great Lakes Review..

Good morning. Thanks for taking the question. When we look at the....

Good morning..

Ciao.

As dentists are waiting for the distribution changes, is that going to be completely delayed or is there going to be like a kinked fire hose response where you'll see a rush all of a sudden, do you think, or are these just missed out on altogether until things get up and going again?.

I don't think it's missed out at all. I think that the compelling reason that dentists choose to go chairside to do digital dentistry is actually just becoming a bigger importance to them.

All of the market research we see and that is published out there is that when they look at what are the most important purchases for them, the number is increasing. But there is an old saying that if I can wait a few months to save real money, am I willing to do that. And we're seeing that dentists are doing that.

And let's not forget there are a lot of great relationships that dentists have with Patterson and with Schein. And so, is this bigger than we would have expected, of course, it is and that's why we've said that.

But what gives all of us a lot of confidence is the record interest in DS World and that's not just in the attendees, that's the number of prospects who are going there specifically to change their practice for the better..

Thank you.

And then, earlier you've commented that, united, the company is essentially unstoppable and that just makes me want to question, are you seeing any integration hiccups that you'd like to call out as far as things that have been unforeseen and/or maybe impeding results on that side?.

What I would say is an integration of this magnitude always has its ups and growing pains. We're asking this organization to be able to operate in a matrix. We're in the midst of the integration and these are big integrations that we're talking about. Do I feel good about the individuals we've chosen to be country managers? Absolutely.

Do I feel good about the individuals running our SBUs? You bet. We've got a talented team. But – and collaboration is a critical component, so is leadership.

And that takes time to be able to do this and, frankly, this disruption in North America as we figured out our go-to-market plays a role in all of our 11 SBUs, right? And I could spend the next five hours going through each one of these to talk about it, but I am absolutely confident in our ability to get this done.

But we will make changes, there's no – and we have made changes..

All right. Thank you..

Thank you, David..

We'll take our final question today from Jason Bednar with Robert Baird..

Good morning, all. Jeff, I just wanted to come back to the topic that's been asked here in some prior questions, and really just ask in a very direct way.

Is there any way you can provide what you're assuming Sirona specific growth rates are now today versus, say, one year to two years ago? Has that long-term growth fallen from 8% to 6%, or 8% to 4%? And we're just looking for something a little more concrete in the magnitude of the growth reset? And then, I just have one more follow-up..

I appreciate the desire to have that. We've taken in everything into account when we came to the conclusion that we have – just like we're not going to break out the guidance going forward for any one of our SBUs individually. We're not going to do that here.

What I would tell you is that CAD/CAM is a much smaller part of our totality and so is imaging, and so is treatment centers, which we've talked about at the – our part of the impairment. But what you should focus on really is the guidance we gave today and the fact that 7% in the back half.

And this is – a critical driver for this is our Technologies, which means CAD/CAM and imaging playing an important role. And by the way, treatment centers has had a very strong year for us..

Okay. Understood. And then just to come back to some of international equipment comments. I'm pretty sure there might be a pause in European markets because of – from the competition right now.

But can you comment on what you're assuming for conversion rates in Europe for the back half of the year? I apologize if missed that earlier, but especially some of those competitive systems are not yet available, just if you're assuming any change in the conversion rate you saw coming out of IDS.

And then, we also saw some weakness just in Schein's Australia business, there – there Australian equipment business yesterday. Just I know it's not a huge market for you, but just wondering if you've seen similar softness..

Okay. Look with regard to the conversion from the IDS, we mentioned that we felt that that translated to about $10 million less than we had assumed in our last guidance, right.

And the way we measure this, Jason, is people can hand in these vouchers until 90 days after the show, and then we kind of drop off and we do not count it as a sale at the show anymore, and people do not get special pricing on it, but that doesn't mean that some of them might buy later.

But we've built a little bit of this expectation into our guidance, but it's not too much, right..

I think, we can effectively say we're not assuming it. So, it would be a upside..

Okay. Thanks, guys..

Thank you..

Ladies and gentlemen, that concludes our question-and-answer session. Mr. Slovin, I'll turn it back to you for closing remarks..

Thank you very much for joining us on our second quarter call. I know there was a lot to digest in this call. And appreciate the questions that we had from the analysts.

I want to tell you that Dentsply Sirona is committed to executing on our back half, and I look forward to updating you on that on our third quarter call, and so does our management team and our 16,000 around the globe to making our back half as strong as we discussed in our guidance today.

Thank you very much, and I hope you enjoy the rest of your day..

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect..