Joshua Zable - DENTSPLY SIRONA, Inc. Mark A. Thierer - DENTSPLY SIRONA, Inc. Ulrich Michel - DENTSPLY SIRONA, Inc..

John C. Kreger - William Blair & Co. LLC Robert Patrick Jones - Goldman Sachs & Co. LLC Tycho W. Peterson - JPMorgan Securities LLC Steve C. Beuchaw - Morgan Stanley & Co. LLC Erin Wilson Wright - Credit Suisse Securities (USA) LLC Jeffrey D. Johnson - Robert W. Baird & Co., Inc. Jonathan David Block - Stifel, Nicolaus & Co., Inc.

Brandon Couillard - Jefferies LLC Yi Chen - H. C. Wainwright & Co. LLC David M. Stratton - Great Lakes Review.

Good day and welcome to the Dentsply Sirona Third Quarter 2017 Earnings Call. Today's conference is being recorded. And, at this time, I'd like to turn things over to Joshua Zable, Vice President, Investor Relations. Please go ahead..

Thank you and good morning, everyone. Welcome to our third quarter 2017 conference call. Before we begin, please take a moment to read the forward-looking statement on our presentation. During today's conference call, we'll make certain predictive statements that reflect our current views about our future performance and our 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 Mark Thierer, Chief Executive Officer of Dentsply Sirona..

Okay. Thanks, Josh. Good morning and thank you all for joining us on our third quarter earnings call. Our results for the third quarter were strong. Our reported revenue was up 5.8% to just over $1 billion and our adjusted EPS was $0.70 compared to $0.66 last year.

We feel good about these results and we feel good about our outlook for the balance of the year. I'm very pleased to be part of this great organization. And I thought I'd begin by sharing my thought process behind joining Dentsply Sirona.

As some of you know, I just finished up my tour, integrating my former company, Catamaran, into the OptumRx platform. We sold Catamaran to UnitedHealthcare in July of 2015 for $13.5 billion and they asked me to stay on and integrate the businesses.

In the past two years, the team created a very strong combined platform, leveraging the very best of both firms. Now today, OptumRx is a $65 billion business with strong cash flow, a single technology platform and excellent operating leverage. The combination created a true market leader in the PBM space, and I was proud to be part of it.

Candidly, I was not expecting the call from Dentsply Sirona. And I spent a few intense weeks doing due diligence on the company. I scoured the financial statements, inspected the R&D pipeline and reviewed in detail the integration plans and status. The bottom line is I really liked what I found.

Dentsply Sirona is the global leader in dental with a 17% market share in a highly fragmented market. The company is the recognized leader in innovation. We're leading the digitization of dentistry. Dentsply Sirona has a very solid balance sheet, with ample cash and modest leverage.

This capital structure provides excellent optionality for management to grow the business through M&A or by returning capital to shareholders through buybacks. In short, I concluded that Dentsply Sirona has everything it needs to significantly outperform the market.

And now after spending a month immersing myself in this business, I'm more convinced than ever. All we need to do is execute. So let's talk about execution and what we're going to do. We'll be using a playbook that is familiar to those of you who followed the Catamaran story. The first and most important thing is fielding the right leadership team.

In my first week on the job, we announced the addition of Nick Alexos, as EVP and Chief Administrative Officer, leading a host of corporate functions. Nick co-founded Madison Dearborn Partners, a leading private equity firm, where he spent 29 years, primarily in the healthcare space.

Nick served on the board of Sirona Dental Systems for six years, and so he knows our business very well. Personally, I've known Nick for 20 years and he will be a phenomenal leader and a partner as we grow this business together. We also added Keith Ebling as EVP, Secretary and General Counsel.

Keith was most recently EVP and General Counsel with Express Scripts, a $100 billion pharmacy benefit management firm that ranks 22nd on the Fortune 500 list. Keith is one of the brightest and most accomplished GCs in the entire healthcare industry and we're truly fortunate to have him on our team.

Beyond Keith's strong legal expertise, his skills in M&A, strategy and supply chain will help us drive our growth agenda. Nick and Keith are joining a very capable executive team of Bob Size, our President and Chief Operating Officer, and Maureen MacInnis, our Chief Human Resources Officer.

Beyond our executive team, Dentsply Sirona has a very deep bench of skilled operators and domain experts in the dental industry. I'd stack this team up against anyone. Page two in our playbook is providing total clarity around what's important. We just spent a week together in Germany with our top 30 business leaders from around the world.

There, we constructed our top five priorities, with detailed plans and teams to attack each one. Every single employee in the company now knows what needs to happen, who's accountable and when it will be done. I'd like to highlight two of our most important priorities for you. Our top priority is reigniting growth.

We're going to build a growth engine and reclaim our position as the growth leader in dental. At the heart of it, this strategy is all about allocating capital and sales resources to the highest growth opportunities in the dental marketplace. M&A will also play an important role to add to our strategic footprint.

The second priority I want to talk about is operational excellence. Our goal is to be the best operator in the dental industry in terms of cost, quality and overall efficiency. We're starting with a focus on operating expenses and have put a plan in place to cut an incremental $100 million of costs in 2018 and 2019.

Beyond expense control, we intend to drive revenue synergies well beyond this target. You'll see those numbers in our reported revenue growth performance. In summary, I'm genuinely excited about leading this team. I view this as a once-in-a-lifetime opportunity to take the dental industry market leader to a whole new level.

And the capable men and women here, inside Dentsply Sirona, really do know the business and they know what to do. I want to take this opportunity to thank our entire team for embracing change and for welcoming me with open arms. I believe we have the best people, products and technology in the entire dental industry.

And now, coupled with a new leadership team and a relentless focus on execution, our future looks very bright. And as I've told many of our people, I truly believe this will be an amazing ride.

So now I'd like to turn the call over to our CFO, Uli Michel, who'll provide a more detailed look into the quarterly results and our underlying assumptions for the fourth quarter.

Uli?.

Thanks, Mark, 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 third quarter, our reported revenue increased $55 million to $1,009 million, up 5.8%.

Foreign exchange movements were a tailwind to revenue of 210 basis points. Adjusted sales of our combined businesses, excluding precious metals, increased 4.3% on a constant currency basis. Internal growth increased 2.4%, excluding a 190-basis-point favorable impact from net acquisitions.

Based on our estimate, overall sales growth was favorably impacted by approximately $8 million during the quarter related to the transition in distribution strategy. Our growth was driven by strength in the U.S., which grew 7.1%. We are beginning to see the benefit of our expanded distribution agreement in equipment.

In anticipation of demand from a successful Dentsply Sirona World, we saw $10 million to $15 million in orders placed ahead of schedule that we originally expected in Q4.

Based on our estimate, in the U.S, year-over-year changes in dealer equipment inventory related to the transition in distribution strategy impacted Q3 sales growth favorably by approximately $18 million. Europe grew 1.7%, driven by strength in Southern Europe, with particular strength in the Russian market.

Based on our estimates, year-over-year changes in dealer equipment inventory related to the transition in distribution strategy impacted Q3 sales growth unfavorably by approximately $5 million in Europe. Rest of World declined 2.9%, driven by lower sales in Australia and in Canada.

Canada has also been impacted by the transition to expand the distribution. We estimate the year-over-year changes in dealer equipment inventory related to the transition in distribution strategy to have impacted Q3 sales growth unfavorably by approximately $5 million in this region.

We expect our performance to rebound here beginning in the fourth quarter. As you will see in the 10-Q, this quarter, we began reporting three segments instead of two, as previous management reorganized the business in Q3. Our first segment, Chairside Consumables & Endo, grew 4.3%.

Our second segment, Implants, CAD/CAM, Prosthetics & Healthcare, declined 1.1% on an internal basis. Our implant business drove the decline versus growth in all the other areas. Our third segment, Imaging, Treatment Centers & Orthodontics, had internal growth of 5.3%.

Gross profit as a percentage of net sales, excluding precious metal content, increased by 120 basis points to 55.9% from 54.7% in the prior year. On an adjusted basis, gross profit margin was 59.1%, up 130 basis points for the quarter. The increase was associated with a more favorable product mix.

Reported SG&A expense, which includes R&D, was $430.5 million, up $51.4 million or 13.6% versus last year.

Adjusted for non-GAAP items, including amortization expense and other costs related to the merger, SG&A expense was $379.4 million or 37.9% of sales, excluding precious metals, up 90 basis points from last year, driven by increased selling expenses. In total, GAAP operating income was $107.9 million, down from $126.6 million last year.

Excluding the non-GAAP items set forth in our non-GAAP financial measures, adjusted operating margin was 21.1%, up 30 basis points compared to 20.8% last year.

On an adjusted basis, which excludes the tax impact on non-GAAP items, our effective tax rate was 18.4%, with tax expense of $37 million this year versus an expense of $31.3 million last year and an effective tax rate of 16.8%. Last year's low Q3 rate included the year-to-date true-up.

For the full year 2017, we now expect an effective tax rate of approximately 18%. Q3 U.S. GAAP net income attributable to Dentsply Sirona was $90.6 million, down from $92.5 million last year. Third quarter 2017 GAAP EPS was $0.39 compared to $0.39 diluted GAAP EPS in the prior year. Adjusted non-GAAP net income increased 5.6% to $164.3 million.

As Mark mentioned, adjusted earnings per diluted share was $0.70 compared to $0.66 last year. For a reconciliation of GAAP EPS to non-GAAP adjusted EPS, please see our earnings press release. I will now discuss elements of the cash flow statement this quarter, highlighting the key drivers.

Cash flow from operating activities during the quarter was $164.4 million. The increase over last year was mainly driven by higher adjusted net income, excluding non-cash items. We view this as a key metric and one of our strategies is to improve our cash flows.

Cash used in investing activities was $43.9 million, of which, capital expenditures were $33.8 million for the quarter. We expect to utilize our balance sheet as key value driver for our stakeholders. We continue to expect CapEx for the year to be in the range of $130 million to $150 million. Now turning to guidance.

We are narrowing our guidance range to $2.65 to $2.70. Even at the low end of the range, our guidance implies over 20% adjusted EPS growth in the fourth quarter. Our guidance includes the following assumptions. Full year constant currency sales growth of around 2%.

This includes approximately 200 basis points of net benefit from acquisitions, implying flat internal growth for the year. At current exchange rates, this translates to reported revenues, excluding precious metals, of approximately $3.95 billion. This implies between 4% and 5% internal growth in Q4.

We expect to exit the year with momentum heading into 2018. Our EPS range implies a full year diluted share count of approximately 233 million shares versus the 222 million in 2016. This reflects approximately $0.09 headwinds from share count. We anticipate FX headwinds of $0.08 to $0.10 for 2017.

Overall, this was a solid quarter both from a financial and operational standpoint and we are pleased with our results. I'll now turn the call over to Mark.

Mark?.

Thanks, Uli. Obviously, as Uli said, we feel good about the progress in the quarter and our outlook for the full year and we now have the entire company aligned around our top five priorities and focused on executing.

Before we close out the call, I want to take a moment to announce that Uli will be retiring to spend more time with his family back in Germany. Uli has been with the company since 2013 and has played a significant role in facilitating the merger and all the integration work to-date for Dentsply Sirona.

We thank Uli for all of his help in bringing these two companies together and wish him much success in his retirement. Effective next week, Nick Alexos will assume the role of Chief Financial Officer. Uli will remain with the company until the end of the year to ensure a smooth transition.

I'll now turn the call back to the operator and we'll take questions.

Operator?.

Thank you. We'll go first to John Kreger, William Blair..

Hi. Thanks very much. Mark, welcome to the world of dental. Can you maybe just expand a bit on your comments about the due diligence work you did? I'd just be curious.

What is your view about the longer-term growth opportunity in the dental market? And maybe if you could expand on where you see the biggest kind of revenue cross-selling opportunities for you guys to sort of grow, hopefully, in excess of the market trends. Thanks..

Thanks, John. It's good to talk to you again. Well, you know that I'm all about growth and that's been my fastball for 20 years. And so I came here after this diligence work to drive growth. And we've built a specific plan to reignite this growth engine, as I called it. And I'll walk you through at a high level exactly what we're doing.

The first thing we're focused on is strengthening the frame. And here, I talk about building an integrated operating model, really forming a springboard for growth going forward. We're going to get focused on our sales force and our sales force effectiveness. We have 4,000 reps in the field and this is a major asset for the company.

So how do we train, measure and incentivize this huge investment and drive new levels of return on that investment? Part of my diligence included a deep dive on the new product pipeline. And this is one of the areas where the company excels.

Our challenge now is how do we allocate the biggest bets to the biggest opportunities? Where are those areas for the largest opportunities for outsized growth in the market? And that work is in full swing right now. We also have a strategy around channels.

And here, we're talking about building on and optimizing our relationships with leadership companies like Henry Schein and Patterson. You look at their footprints and their footprints with the dentists. They really do have amazing relationships and very strong footprints. And so we're looking to take those relationships to a whole another level.

I'd also say part of our growth strategy focuses on the DSO market. And here, we intend to take an enterprise approach, treat this market segment discreetly and treat them like a true national account, bringing a one company enterprise approach to that market.

And the last area, John, which I know you've followed the Catamaran story, so you know this is part of the playbook, will be M&A. And here, our strategy will be all around buying growth, both buying earnings growth and revenue growth over time. We'll add to the strategic footprint as required and these will be accretive acquisitions.

Those are the kind I like. I would say that from an M&A standpoint, we're not really missing anything, so we'll be opportunistic. And I wouldn't expect us to be moving into the M&A space in the near term. But this will be something in 2018 that we'll be taking a hard look at. Hopefully that answers your question..

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

Hey, Mark. Welcome back. Good to reconnect..

Thanks, Robert..

So, just on some of the updates you gave around cost cutting and the revenue synergies. I just want to make sure I understood correctly. It sounds like you think there's an incremental $100 million of cost in 2018 and 2019.

Is that on top of the $75 million that was previously communicated or is that kind of the new target there? And then on the revenue side, your intention to drive synergies beyond the $100 million, can you maybe just give a little bit more on the areas of growth you're particularly targeting there? And then, any potential timeline would be really helpful.

Thanks..

Thanks for the question, Robert, and it's good to reconnect. Yeah. This is one of the things that jumped out at me in the diligence. There's a lot of room in the income statement and there's no doubt about that. The team has done a nice job already of driving tens of millions of dollars of synergy into the run rate. So, good work has been done.

But what I'm talking about is, in fact, an additional $100 million starting today going forward on top of what's already embedded in the run rate. So, we would expect from a timeframe standpoint to do this over calendar year 2018 and 2019.

Now the way we're doing it is really restarting the integration management office and sort of going to the playbook that I've used in the past. We're looking at eliminating redundancies. We're looking fresh at manufacturing site consolidation, more efficient use of head count.

And I think you could just call it better overall hygiene of how we manage our costs. So Nick Alexos and Bob Size are leading this effort and I've sat down with them. They promised me that they won't let you down. So that's the game plan. We're going to attack this with a whole new level of vigor.

Now on revenue synergies, we do have a bunch of work in-flight to drive new revenue synergies. And I've had some good examples already since the merger happened 18 months ago. And we have substantial opportunity here.

But you know when you drive revenue synergies through new product, the timeline is longer and it will take time to surface on the revenue line. So I do see tens of millions of dollars of revenue synergy. And you'll see it coming through in our financial results on the revenue line. So hopefully that answered the question. Thanks..

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

Hey. Thanks. Mark, maybe I want to follow up on that last point. I think a key point in the debate is just how fast the Sirona business can grow. That's heavily dependent on CAD/CAM, had been growing mid to high-single-digits prior to the merger. I'm curious as to what your view is of the steady-state growth of the Sirona business is.

What your view is on potential reacceleration there? Is that dependent on new products to reaccelerate the growth? And if you could also maybe just talk about the context of that business and increasing competition from the scanner players, that might be helpful too..

Okay, Tycho. Thanks for the questions. So I was in Bensheim, I mentioned, with our whole leadership team. I had a chance to walk through the factory where we make the CEREC gear, all of the imaging gear, and it is staggering to see what we've built. And so, this is the future of the business. This is the future of the industry.

And we do see growth in CAD/CAM. I do believe we continue to lead digital dentistry broadly. And the market is headed in this direction. We see growth in both CAD/CAM as well as the image capture and the whole technology that front-ends this. And so we're making big bets in this area, part of the area that I talked about in terms of R&D prioritization.

And when we align our investment dollars opposite growth opportunities, this is where we're going to have outsized investment in terms of new product development. I think one thing I'd like to share is actually – it's anecdotal, but it's a little bit of my own personal story. So my dentist in Chicago is a fully digital CEREC dentist.

And so he owns all the gear. He has an acquisition unit where he captured a digital image using Omnicam of my tooth. This just happened a few months ago. He actually had me walk into the other room. He sent that image to the milling machine. And I watched the machine cut my tooth out of Zirconia. And I was out of there in one and 1.5 hours.

So as a consumer, this single-visit dentistry model is very powerful. And when I asked him about, what does this mean to you? What's the benefit to you, my dentist? He told me he was doing 80 crowns a month and that the level of efficiency and the time that he saves and the improvement in his practice is off the charts.

And I have to say that, for me, I don't have a lot of time. And getting in and out of there an hour and a half one-time was wildly compelling. So there's a lot of growth and a lot of opportunity in this space and we're going to place big bets on it..

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

Hi. Good morning. And I'll reiterate the welcome aboard to all the new faces there. I want to touch on just one point here in Q&A and its growth.

It should be helpful to get a sense from you how you've seen things evolve on a couple of dynamics that are growth related and how they've impacted your thinking on the implied change to the fourth quarter outlook? I mean, one would be market growth.

Anything you've seen there makes you feel any differently relative to the thinking over the course of this summer on hardware or consumables and then inventory. What's the underlying thinking on inventory as a component of revenue growth from here? Thanks..

Okay. Thank you. Well, maybe I'll take a swing at 4Q and how we landed where we landed and then ask for some help from Uli on inventory. So, as I said, when I came in, and as part of our announcement, we reiterated guidance on October 2. We'd have had a different action if I'd have seen that we had a problem. I knew it was in the range.

And so today, when we look at the fourth quarter, we pressure tested this pretty hard. I will tell you that my goal, my personal goal is to position this company for a strong 2018. And we're not intending to mortgage our future here just for a outperformance in the fourth quarter. So, as I said, we feel good about the third quarter.

We feel very good about the fourth quarter and the full year outlook. Now, as you asked the second part of your question regarding inventory, from my standpoint, I look at the balance sheet and I look at how much inventory we have on it. I look at our inventory turn ratio. We have opportunities to improve how we manage inventory in this business.

And as it comes to our channel partners, it's never been our job to manage our partner's inventory. And our goal is to manage our business as efficiently as possible. And we do that through the best demand planning process that we can possibly build.

So, Uli, maybe some comments on inventory?.

Yeah. Again, as Mark mentioned, it's our distributors who manage their inventory. But, of course, when we give guidance and do our forecast, we have to make assumptions on what their sell-through might be and what they will order from us consequently.

So when we put together our guidance, last time, we had originally anticipated that there would be a reduction in dealer inventory in Q3. What we told you now is that our current belief is that overall inventory for equipment in distributors that are related to this channel transition increased by about $8 million.

We came up approximately $18 million in the U.S. and we're down $5 million each in Europe and Rest of World. A big part of this is what I also mentioned in the prepared remarks, a purchase by the North American distributors in anticipation of a very strong DS world, which we had originally modeled to be purchased in the fourth quarter.

So we have this, call it, $10 million to $15 million that came in the third quarter and made the inventory change a positive in the third quarter. What we, at the moment, model for the fourth quarter is basically a reduction in the same magnitude than last year.

Last year, in the fourth quarter, distributors reduced equipment inventory in the magnitude of $30 million and we would anticipate there to be a similar reduction now.

Hope this answers your questions, Steve?.

Thank you. Next question..

Next is from Erin Wright, Credit Suisse..

Great. Thanks. To the extent, I guess, you can speak to it, can you parse out kind of the North American trends in consumables right now and what sort of visibility I guess you have on that metric and sort of underlying demand trends, more so from a consumables perspective parsing out all sort of the channel dynamics? Thanks..

Yes, Erin. I will address this. It's been very interesting. I've been reading everything on in terms of transcripts and everything everyone is saying just like you and also doing research on the market data. What I'm finding is there isn't good market data available on consumables. And it's kind of stunning that it sort of doesn't exist.

But the way I gather my instinct on it is by talking to customers and I've done so already with our major distributors and spoken with each of the leaders as well as some large DSOs, some large buyers. And my sense is that we should expect low single-digit type growth in the consumable space. I believe it's driven both by price and volume.

And I do think that when it's all done we should be growing faster than the market. So that's not a specific answer to your question, because there's not good data available, but that's my horse sense..

We'll take our next question from Jeff Johnson, Baird..

Yeah. Thank you. Good morning, guys. Uli, let me just start with you and say I wish you much health and happiness in the future. It's been nice working with you. Mark, a couple questions for you. I guess I'll ask a two-parter here. One, when I look at biggest opportunities on the revenue side, dental implant stands out quite a bit.

To me, that market seems to be growing mid-single-digit. You guys seem to be lagging it by maybe a 10 full points at this point or so.

So just what would be the plan there or what do you see is the opportunities there? And then on the $100 million in cost cuts over the next two years, would you commit to updating us on that fairly regularly, providing us progress reports? And maybe you could help us understand one or two of the biggest levers in those cost cuts over the next two years? Thank you.

Okay. Jeff, good questions, and I'll address them both. On implants, this is a big market and a very attractive market. And we're paying attention to what our competitors are doing. And we are underperforming, in my opinion. We do have a full product line. We've got very high-quality products. And so this is an execution issue.

And for some of you who've followed the Catamaran story, you know that my bias is to run to the fire. So we have already begun a deep inspection and operating review of the implant business and we have a plan to get it back on track very, very quickly. This is an attractive market and we should be leading in this market.

Relative to the synergy numbers and providing you regular updates, the best regular update will be in our earnings per share that you'll see reported on a quarterly basis. I am happy to give you sort of a general update on where we're tracking.

The areas of cost savings are up and down the income statement, all the way from cost of goods through our SG&A. There isn't an element of the business that we can't perform better and this is what I talk about in terms of good hygiene. So I think on our quarterly calls, I will be open to giving you some insight into status.

But we'll get this $100 million into the P&L in 2018 and 2019.

Next question?.

Next is from Jon Block, Stifel..

Great. Thanks, guys. Good morning. I'll also have a two-parter and it's sort of both follow-ups to earlier questions. Maybe first just to start, the 4.3% consumable number, the internal growth seems particularly solid, especially considering some of the adverse weather in the quarter.

Maybe if you can talk about if there was any buy ahead of a price increase or do you think that really is representative of the market? And then just going back to that incremental $100 million in expense savings, Mark, in 2018 and 2019, how do we think of that in terms of the cadence? Is it somewhat linear or is it back-end weighted as you continue to sort of scrub the various business units? Thanks, guys..

Okay, Jon. Thanks for the question. Yeah. The performance on the consumable business was – we were pretty happy. And was there a big buy ahead? No. There wasn't. We did see an effect for the weather issues. The hurricane probably had 100 bps negative impact on the U.S. market. So hopefully that addresses your consumable question.

On the $100 million and how to place it into your model on a calendar basis, I'm probably not going to be specific on exactly how it's going to flow through. I'll tell you we'll have cost savings that we'll realize through the balance of this year. We have some immediate opportunities to improve and save money.

And then, I do think it will be pretty ratable over that two-year period. When you start thinking about potential site consolidations, there's a longer tail to some of these actions. But in terms of expense management and just better hygiene, that will take some time to run into the P& L, but we'll get it done in 2018 and 2019.

Next question?.

Next is from Brandon Couillard, Jefferies..

Thanks. Good morning. Mark, curious to hear your perspective on the types of investments you think are needed in the business to sort of reinvigorate the growth equation. And, secondly, how you really plan to measure the effectiveness of M&A, whether that's in terms of ROIC or market share.

And how much opportunity you really see across the fragmented landscape. Thank you..

Okay, Brandon. Well, maybe I'll just start with a framework that I've used in my career as it relates to investment and allocating capital, making choices. The first place we allocate capital here is in our base business.

And here, I'm talking about extracting cost turnaround and invest it in technology, key people, activities and efficiencies in the business to create a leaner, meaner operating machine to grow from. From there, I believe in allocating capital to M&A. And these are accretive acquisitions to strengthen the footprint. I mentioned this earlier.

The third place I look is then share buybacks. And now with the stock cheap and I'd view it as cheap, it is an attractive alternative and one that we intend to continue. And then, finally, there would be dividends. And so that's the capital deployment strategy.

Now as it relates to investments and M&A, we have a detailed plan and a heat map already built. Dentsply Sirona has a lot of experience in M&A. And in my last run, we bought 12 companies. And so I bring a view on M&A.

And then when you combine it with Nick Alexos and Keith Ebling, both of whom have deep M&A skills, we have a machine that we've built that's pretty well equipped to look at allocating capital and buying growth. And so, hopefully, this is responsive, but sort of in rank order, we're buying growth to drive revenue and earnings growth.

We're buying technology to help our product line be successful in a dentist's office. We are buying capabilities to fill out our strategic footprint, and I don't think we need a lot. And we are focused on accretive acquisitions. So I hope that helps you understand how we're thinking about putting investments to work.

How will we measure them? You'll measure them in EPS growth. And we do have an ROIC model that we use inside the business. Everything's got to clear hurdle rate. We're focused on our weighted average cost of capital. We know what kind of hurdles we need to pass to drive shareholder value. And we put that up against every analysis.

We put that up against a share buyback model. So the drill on allocating capital is a pretty well thought out set of calisthenics. And we've got a lot of help around here helping us think about that. Next question..

We'll go next to Yi Chen, H. C. Wainwright..

Thank you.

Regarding distribution, apart from the agreement with Henry Schein, is Dentsply contemplating something else to become less reliant on Patterson?.

Okay. Thank you for that question. Well, first of all, I'll just tell you I had a 2.5 hour meeting with Stanley Bergman a couple weeks ago. And it was a – there was a lot of excitement in the room on his part and mine. We are both very committed to this relationship. And, candidly, the change in the U.S.

equipment market for Schein – they've been waiting for this for a very long time. So these folks who call on so many dentists in the United States, they know our products well. And, candidly, they're off to a very strong start with this new distribution agreement that we've put in place.

And as it relates to Patterson, I will tell you that they are an equally important partner of ours. And we've had a very unique relationship with Patterson, as you well know, for a very long time in North America. And they're committed to growing. They're committed with us. The changes they've had, I view, is very positive.

Mark Walchirk, who's the incoming CEO, is a friend from McKesson. I've done business with him over the years. And they have a very strong leader in Mark. He's totally the right guy for that job.

And we're looking forward to spending some quality time with the Patterson executive team and figuring out how to take that business relationship to a whole another level. So, in short, we do plan to make changes to the relationship that includes improving our working relationship and trying to expand that relationship as we work together..

We'll go next to David Stratton, Great Lakes Review..

Good morning. Thanks for taking the question. Back to the $100 million in synergies, I just like you to parse out any differences. So the company had previously communicated around $125 million in cost synergies in the first three years of the merger. Now you're saying $100 million on top of the tens of millions that have already been realized.

And I was wondering if you could bridge what has been realized with what is expected and quantify any difference from what has previously been communicated to us?.

Well, let me try it this way. We've accomplished tens of millions of dollars of synergies. They are in the run rate and they are in the P&L. Good work is going on. Now we're starting from today and moving forward and what we're saying is there will be an incremental $100 million of operating costs that will come out of the P&L in 2018 and 2019.

So there's no overlap – this is incremental to what's already been done. And that will be executed through this IMO that I described. You'll see it run into the P&L over a two-year period. And then in addition to that, the revenue synergies we talked a little about will run on top of that and you'll see them surface on the revenue line.

So hopefully, David, that's a little more clarity around our synergy commitments.

Next question?.

With no further questions, I'd like to turn things back to Mr. Thierer for closing remarks..

Well, great. Thank you very much for joining us on our call and we look forward to speaking to you all in February. Have a good day..

That concludes today's conference. We thank you for your participation. You may now disconnect..