John P. Sweeney - DENTSPLY SIRONA, Inc. Nick William Alexos - DENTSPLY SIRONA, Inc. Don M. Casey - DENTSPLY SIRONA, Inc..

Brandon Couillard - Jefferies LLC Jeff D. Johnson - Robert W. Baird & Co., Inc. Tycho W. Peterson - JPMorgan Securities LLC Jonathan David Block - Stifel, Nicolaus & Co., Inc. Erin Wilson Wright - Credit Suisse Securities (USA) LLC Nathan Rich - Goldman Sachs & Co. LLC Steven Valiquette - Barclays Capital, Inc. Steve Beuchaw - Morgan Stanley & Co.

LLC John C. Kreger - William Blair & Co. LLC Yi Chen - H.C. Wainwright & Co..

Good day, ladies and gentlemen, and welcome to the Dentsply Sirona Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I will now like to introduce your host for today's conference, John Sweeney, Vice President of Investor Relations. Sir, you may begin..

Thank you, Ashley. And good morning and thank you, everybody, for joining us today. Welcome to our third quarter 2018 conference call. I'll remind you that an earnings press release and slide presentation related to the call are available on our website at dentsplysirona.com.

Our earnings call presentation and many of the numbers discussed on the call today will be non-GAAP financial measures and there are reconciliations provided in our press release and in our earnings deck.

The earnings call will be a little longer than usual today, as Don and Nick would like the opportunity to tell you about the diagnostic they've completed on the business and details of the upcoming restructuring plan. But before we begin, please take a moment to read the forward-looking statements in our earnings press release.

During today's conference call, we'll make certain predictive statements that reflect our current views about the future performance and financial results and we base those 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 call over to Don Casey, Chief Executive Officer of Dentsply Sirona..

Thanks, John, and thank you for joining us on our third quarter earnings call. We have a lot to cover, and appreciate you taking time with us this evening. Before talking about the specific results, I wanted to offer some perspective. After spending nine months here, a few things are very apparent.

The first is that the dental industry is a great place to be with positive underlying trends relating to demographics, technology and economics.

Further, I believe, that Dentsply Sirona is well-positioned to succeed with a strong global footprint, important brands that have a loyal following, a strong track record of innovation tracing back over 100 years and, most importantly, a dedicated, passionate workforce.

But it's equally clear that our current business performance and trajectory over the past three years is not where it needs to be. We are not living up to our potential to deliver for our customers, investors and our employees.

Our results in this quarter further highlight the need to take decisive action to better position the company for long-term value creation. As part of the call today, we will outline the results of an extensive diagnostic and offer a major restructuring plan that we've begun executing against.

Key components of that plan will focus on how we deliver sustainable 3% to 4% revenue growth and an operating margin of 20% by 2020, with further improvements targeted through 2022. We plan to simplify the organization and have developed an aggressive cost-cutting savings target of over $200 million today.

Just as we are disappointed in and fully accountable for our results, as we go through the presentation today, you will see that we are optimistic about the future of the business and that we are committed to taking the necessary steps to deliver attractive financial performance going forward. Let's begin with the summary review of the third quarter.

As you can see on slide 7, our top line was down 6.5% on internal basis in the third quarter.

The revenue decline was significantly impacted by planned changes in our dealer inventory stocking levels in our Technologies & Equipment segment; and a $20 million reduction in Consumable revenues, resulting from a startup challenge in the new central distribution hub in Europe.

Our lower top line and increased expenses drove an adjusted operating income margin of 13% and adjusted EPS of $0.38. Operating cash flow was $126 million in the third quarter, reflecting the strong underlying cash flow generating capabilities of Dentsply Sirona.

Before I go into more detail on our restructuring plan, I will now turn the call over to Nick Alexos, who will go into more details on our financial performance and outlook for the rest of the year..

Consumables and Technologies & Equipment. Our Consumables segment accounted for 47% of our revenue for the third quarter and represents a diverse portfolio of products that provide steady growth at stable margins.

However, in Q3, as Don mentioned, our Consumables segment had an internal revenue decline of 3%, as we had a $20 million revenue shortfall resulting from operational issues at our European distribution center in Venlo, the Netherlands. Venlo is our centralized European distribution site.

As a result of the move to Venlo during the last year, in Q3, we experienced startup shipping delays for some of our product lines. We've put systems and a team in place now to fix these particular issues, and have seen improvement back to levels required for hitting our fourth quarter shipment forecast.

While this was unfortunate, the facility will provide us with the infrastructure to more efficiently serve our customers in the European market. Excluding the Venlo impact, Consumables revenues actually achieved low-single digit growth.

The lower shipment volumes for Venlo, however, which caused also an unfavorable mix shift on our product sales, were the principal driver of our Consumables segment margin decline by 370 basis points as compared to the 2017 third quarter. If you now go to page 10, segment performance for Technologies & Equipment.

This segment accounted for 53% of the revenue for the third quarter. As you all know, our T&E segment has a number of unique technologies and includes our implant and healthcare businesses. Q3 revenues in this segment declined by 11.3% and were down 9.3% on internal basis.

Here, we had planned for and previously discussed some of the significant revenue reductions during the third quarter due to the dealer inventory restocking (00:06:37) of our equipment.

We had $34 million of dealer destocking in the third quarter, as opposed to $35 million of dealer stroking increases in the prior-year quarter for a net reduction in year-over-year revenue growth of $69 million. Excluding the year-over-year stocking and destocking, T&E would actually have posted commendable growth for the quarter.

In partnership with our primary dealers, we had actually a very successful DS World in October, which evidences good retail demand for our full range of products. We did also see positive traction in implants and in our healthcare business, Wellspect, which serves the hydrophilic catheter market.

Healthcare showed strong performance, up mid-single digits. This is a business that continues to realize revenue and profitability growth. Technologies & Equipment margins were down 1,330 basis points as compared to prior year. This is significant margin compression as a result of a variety of factors.

The year-over-year changes in Technologies & Equipment revenue due to the destocking that I mentioned versus stocking the year before, reduced T&E margins by about 600 basis points through just lower absorption in our fixed cost structure.

Product mix and pricing in certain businesses in Technologies & Equipment further reduced margin by approximately 300 basis points. And we also had some investments in marketing and sales capabilities, which we've talked about previously, in order to drive the continued growth that we're seeing in retail demand.

And this impacted margins by about 200 basis points. If you now go to slide 11, we can speak to the regional revenue performance. Looking at our business performance on a regional basis, U.S.

revenue declined 10% on an internal basis in the quarter mainly due, once again, to the inventory destocking in our CAD/CAM and imaging business, which is principally in the U.S. Looking to the balance of 2018, we expect our revenues will continue to be lower versus prior year for the same reason.

Going to Europe, revenues declined 8.4% on an internal basis, primarily driven by the revenue shortfall we mentioned with regards to Venlo and some softness in the equipment markets in Central Europe.

As we move into the fourth quarter, we're beginning to see signs of normalized growth in the European equipment market suggesting that the downturn was temporary. Rest of world revenues increased 1.5% on internal growth. Now, why don't we go to slide 12 for our consolidated non-GAAP financial summary.

Revenues on a consolidated basis, excluding precious metals, declined 7.7% in the third quarter and were down 6.5% on an internal basis.

Of the $77 million of year-over-year decline in revenues, as you reconcile back, $69 million was due to the differential in stocking versus destocking for CAD/CAM and imaging; $20 million was due to the problems we encountered in shipping for our Consumables business at Venlo; FX reduced revenues year-over-year by $70 million; and then, acquisitions added $5 million; with the remainder of approximately $20 million driven by organic growth.

Gross profit was $512.1 million or 55.4%, down 360 basis points, as compared to the prior year. Net destocking in our T&E segment accounted for about 200 basis points of this gross margin decline. And then, other factors, including Venlo, mix in price, accounted for the remainder of the gross profit margin compression.

Total operating expenses, which includes R&D, were $391.8 million, up $12 million as compared to prior year or $18 million on a constant currency basis.

While our operating expenses benefit from our cost savings program during the quarter, these savings were more than offset by increased marketing and selling expenses and expenses related to restructuring and the building out of our new organization, as well as additional R&D expenses ahead of IDS and the timing of certain other costs.

Adjusted non-GAAP margins consequently declined to 13%, down 812 basis points, as a result of the gross margin declines that we discussed and the increased SG&A expense.

With regard to the targeted $100 million cost savings initiative, we've already achieved year-to-date about $50 million of actual savings and expect to achieve another $20 million for the remainder of the year, with the balance flowing into our new restructuring program. On a net EPS basis for Q3 were $0.38, compared to $0.70 in the prior year.

Let's go to slide 13 on cash flows, which shows that cash flow from operating activities for the third quarter were $125.6 million, down 24%; and cash flows from operations, less capital expenditures, were $76.2 million versus CapEx of prior year.

In 2018, we continue to expect that capital expenditures will be approximately $200 million or slightly less. One additional cash flow initiative we have is a detailed program to reduce internal inventory levels. At the end of the third quarter, we continued to hold inventory at higher levels than 2017 due to the elevated requirements in Venlo.

And we are now targeting a reduction versus our Q1 level peak of $20 million versus the level that we had targeted previously of $30 million. Lastly, in terms of guidance, page 14.

On an income statement basis, at this point, based on our Q3 performance and our view of Q4, we continue to expect revenue of 2018 at $3.95 billion or a 2% constant currency decline over 2017.

As we are seeing better retail demand for T&E products in key markets, our estimate for the dealer destocking for 2018 is now $110 million to $115 million, slightly above our previous guidance range of $100 million to $110 million, which we think is a quite healthy achievement for this year.

To-date, we've incurred $69 million of destocking, which means we are planning approximately $40 million to $45 million of destocking in the fourth quarter, and that's reflected in our revised guidance. As a result of the weaker performance expected or resulted in the Q3, we now are looking at an OI margin of 15% to 15.5% for the full-year 2018.

Given the lower-than-expected level of performance, adjusted EPS is now at or slightly below the bottom end of our previous range of $2 to $2.15. The new guidance includes the impact of Venlo, as well as some of the noted Q3 SG&A variances and the higher anticipated level of inventory burn. Our tax rate assumption for 2018 remains at 22%.

I want to reiterate our disappointment in our results, and I would also highlight the clear necessity to undertake the actions of our planned restructuring which are long overdue. At the same time, I share my appreciation for all our employees' efforts in working to improve the financial and operating performance of Dentsply Sirona.

And with that, I turn the call back over to Don, who will give an overview of our restructuring plan..

healthcare, which will continue to stand alone; we will then look at digital dentistry, which is composed of CAD/CAM and Orthodontics; next comes equipment and instruments, which will include treatment centers, instruments and imaging; implants will be stand-alone; and finally Consumables, composed of our restorative, preventive, endodontics and lab businesses.

In addition, we will be consolidating our regional commercial organization to focus on common country clusters. This strategy puts the customer at the center of how Dentsply Sirona is organized and, importantly, leverage sales and marketing infrastructure across multiple countries.

This also serves to eliminate the duplication of resources at the corporate, regional and country level.

While we will continue investing in R&D, with spending in 2018 exceeding $160 million, going forward innovation will be prioritized across all the businesses to focus on the large initiatives that can generate the most benefit to the entire company.

As noted earlier, our current model relies on each SBU developing their own R&D priorities, and this has hampered the company's ability to capitalize on the largest opportunities and allocate resources accordingly. This approach will lead to bigger ideas that are delivered faster with more complete support.

One of our biggest assets is our sales force. In addition to maximizing our return to this critical area, we are making some important changes. To become more customer-centric, all countries will move to a single unified sales and marketing structure.

Today, resources in the countries are mixed between some commercial efforts run by the SBUs versus other run by the countries. Further, we've recently concluded a major segmentation study in the sales force effectiveness diagnostic in the U.S. The results will allow for a much more analytically driven approach to targeting and call planning.

This will be enhanced by a single view of the customer, a single CRM system, and a single sales operation platform. It will also facilitate cross-selling opportunities and more pricing discipline, and we will bring this process to the globe. Our experience in places like Latin America and China have also shown the importance of the emerging markets.

In these developing economies, we have seen high-single digit growth opportunities. Applying our model of focused support to other areas of the world will continue to be an important part of our growth strategy. All of these activities will contribute to restarting our growth engine.

I will now turn to margin improvement and organizational simplification. In addition to the structural changes mentioned before, we'll be looking at several other programs to improve our margins. A major initiative is moving to a centralized global supply chain. Our supply chain has historically been run at the business unit or country level.

This does not allow us to leverage critical areas for scale, including manufacturing, global demand planning, logistics, distribution or procurement; all areas that, given our size, should be a competitive advantage for Dentsply Sirona. Moving to one supply chain will allow for scale, improved costs and more reliability.

It's important to note though that this movement will happen over two years as we build the structure necessary to accept this organization and avoid supply chain disruption. As part of our diagnostics, several opportunities to shape our portfolio have been identified.

Going forward, our focus will be on looking to address businesses that are non-core, not profitable or underperforming. There will be a strong bias to action. It should be noted that Wellspect is not one of these assets. This business has been performing well and is accretive to our growth and profitability.

It also benefits from leverage in our share back-office areas. As such, this would be an area of continued investment for us. Supporting both the growth and the margin improvement initiatives is our organizational simplification effort.

In addition to the consolidation around the strategic business units, the regional commercial units and the centralized supply chain, we will be reorganizing our support functions to serve these units. Functional realignment will happen as the commercial units are made operational. Slide 31 details our head count reduction goals.

As a result of the streamlining initiatives and margin improvement programs, we are targeting a net head count reduction of 6% to 8% by 2021 from the current level of roughly 16,300 people today.

This is a very difficult decision for the organization, and we will work with our employees and workers council to determine the best outcome for all of them. On slide 22 (sic) [32], we outline our anticipated $20 million to $25 million cost reduction program.

We fully expect to drive margins of 20% by the end of 2020 and return to pre-merger levels by 2022, with additional improvements thereafter. The restructuring will result in a onetime charge and expenses of up to $275 million. On slide 33, we outline our multi-year expectations.

In terms of revenue growth, we can see Consumables holding steady at 2% to 3%. We anticipate Technologies & Equipment returning to growth in 2019, partially as a result of getting through our 2018 inventory destocking, but also due to the generally improving U.S. retail trends. This segment should grow 4% or even more going forward.

Taken together, we believe this will result in Dentsply Sirona revenue growth at/or above market, with our target of 3% to 4%. In terms of our operating income, our goal is to realize a margin of 22% by 2022. While 2019 will be a year focused on execution, we expect to see margins of 20% by the end of 2020.

This revenue and margin algorithm yield solid double-digit growth and adjusted EPS. This will translate into growth in operating and free cash flow, which we will then utilize to further enhance our financial performance. We understand that we need to reinforce our credibility by demonstrating that we are on track to achieve our goals.

On slide 34, we detail the key activities and associated metrics that will allow you to measure our success and our financial progress. Among the key activities we will report progress on, include the SBU and RCO consolidation, with our expectation that the majority of them will be completed in the first half of 2019.

A second key activity will be implementing a sales force effectiveness program, which we'll be starting in the U.S. and transferred around the world through the course of 2019. Another critical activity is progress in creating a comprehensive R&D portfolio program. We expect it to be completed in 2019, and we'll provide progress reports as appropriate.

And we will also provide an update on our portfolio shaping activities. Among critical non-financial metrics we will report on, include head count reduction, progress in critical growth markets, and the number of clinical education contacts that we have.

Financial measures will include revenue growth, operating income margin, as well as our progress on restructuring charges. This is an ambitious and comprehensive program, and there are obviously risks in pursuing a change initiative of this size.

We've worked with our entire organization and outside advisors to make sure there are adequate resources to accomplish the plan. A phase approach will allow us to focus on completing critical priorities before moving on.

And above all, we have prioritized managing our customers and implementing a strong system of financial control to improve management visibility during this process. So now to summarize. As you heard today, we are taking major steps to restructure our businesses to deliver on the promise of our portfolio.

We've outlined a path that will lead to substantial value creation. We are focused on driving growth, improving margins and simplifying our business. We do recognize the scope of the undertaking and the task at hand. Coming out of that business diagnostic, the board and management are convinced that this is the right plan.

But we also acknowledge that the restructuring will take time. Our near-term priority's execution in 2019 will be a transition year, but you will see signs of progress. We're cognizant of risk mitigation to making sure that we do this in a way that does not disrupt our revenue stream, impact our customers or interrupt our supply chain.

You will see margins of 20% by 2020, with improvement to pre-merger levels thereafter; and we're not done. We're looking for more and are on a path to returning margins to pre-merger levels over the long run or higher.

Our team looks forward to providing an update in 2019, including our progress against the KPIs and business initiatives that we've laid out for you today. As this comes to a close, I wanted to relate that we just completed a two-day Leadership Summit with our top 50 leaders.

I was very impressed by their passion for this company and commitment for delivering to our investors, customers and employees. They're excited about this plan, and this excitement is critical as we put Dentsply Sirona on a more sustainable path. We look forward to updating you on our progress regularly.

In light of the restructuring we announced today, we will not be holding an Investor Day in the fourth quarter. We believe it is critical that we are focused on executing and delivering sustainable value. And with that, we'll open it up for questions.

John?.

Yes. Operator, we'd like to take the first question, please..

Thank you. And our first question comes from the line of Brandon Couillard with Jefferies. Your line is now open..

Thanks. Good afternoon. Quite a lot to digest there.

I guess, Don, with respect to your 3% to 4% sort of top line growth outlook for the next few years, can you sort of speak to how you expect to achieve that, given the number of moves you're making internally and the potential risks from disruption, as we've seen with the distribution center facility transition this quarter?.

Yeah. I think that's a great question. Thanks, Brandon, and thanks for spending time with us today. Look, right now, as we've gone through this change initiative, we've established two core priorities that we refer to as guardrails. The first is, we can't interrupt our customer service and we've got to make sure our supply chain is reliable.

So if you listen to the presentation, we kind of talk about the fact that we will make the supply chain changes gradually. And one of the things we're learning with things like Venlo is, we've got to make sure our processes are in great shape before we transfer.

So we're saying that supply chain will be a little bit more of a gradual kind of over the next 18 months, 2-year program to make sure that we have adequate supply of product that needs to support our selling initiatives. In terms of – on the commercial side, it's really interesting.

I've been here nine months and I've been really impressed with our ability to generate sales in a lot of different places. But I do find it somewhat difficult to say, at a local country level, what our priorities are.

So in our mind, by looking to move to four SBUs – four dental groups, if you will – and really focusing the R&D on bigger and more substantial innovation, we really think that we are going to actually simplify the execution at the country level, which we think will have a positive impact even though there's going to be some change in the back.

The other issue is, we've been really working hard to make sure that our sales force effectiveness program, which we're starting to implement in the U.S. in the first quarter of 2019, is really gradual.

I mean the thing you don't want to do is literally have 2,000 sales and marketing people waking up the following morning and doing something different.

So we're really looking on focusing on maintaining each of the salespeople relationship with their critical customers and really helping them do a better job in understanding all the other areas that that customer is touched by Dentsply Sirona and look at cross-selling it and other solution things. So, yeah, look, we understand it's a big program.

We have spent a lot of time with our leadership group to make sure that we outline clear priorities of, don't interrupt your revenue stream, make sure that you've got an adequate supply of products, and let's really get the commercial organization where it needs to get to quickly, and then let's focus on really making our sales force hum in the field..

Thanks. And I guess one more....

Go ahead, Brandon..

...if I could, just on the head count reduction. Could you just elaborate on what areas of the business that will come out of, whether it's sales, R&D? Thank you..

Yeah. Thanks, Brandon. Look, we understand we gave you guys a ton of stuff tonight and we're going to relax our one-question policy.

So, look, as we go forward, I would tell you the strategic business unit and the regional commercial organization consolidation, it's obviously a big chunk of what we have in the plan right now, and that will happen most immediately.

But as you begin to look at other areas, where we think that there's significant opportunity is around supply chain, around some of the functional areas, that need to begin to reflect the new organizational structure. We think there'll be considerable savings as we go through that. And a lot of this, Brandon, is really eliminating duplication.

If we have a strategic business unit that is in charge of, say, Western Europe; and then the countries in Western Europe have similar people doing marketing of, say, implants, we really want to eliminate some of that duplication. And then, over time, we also really have done a pretty extensive portfolio shaping analysis.

And as we go through that, we think that there are some opportunities to really focus on units that may be not strategic, not really in our core, or really been underperforming for a number of years that we think we can move on, and that's going to have an impact on heads (00:37:22).

So I would tell you, look, the SBU and RCO consolidation, followed by supply chain, are obviously areas of portfolio shaping. And, ultimately, we really don't think that it's going to be a big change in our sales force. We just like to make our current sales force more effective..

Super. Thank you..

Thank you. And our next question comes from the line of Jeff Johnson with Baird. Your line is now open..

Thank you.

Guys, can you hear me okay?.

Yeah, Jeff..

All right. Great. Hey, Don, how are you? So I guess my first question, and I'll make it two very quick questions. But just kind of that path to 3% to 4% revenue and the path to 20%, it sounds like exiting 2020, if I'm hearing you right on that. But I would assume that's going to be choppy.

You've laid out a little bit on 2019, but I would assume we shouldn't connect kind of dots as they're more of a ramp at the end of it or kind of an acceleration in some of those improvements as we get deeper into these efforts..

First, Jeff, thanks for the question. And they don't even have to be quick. Look, we're not going to give you kind of a quarter-by-quarter margin expectation. I do think that we're timing some of the commercial changes relatively quickly.

And, look, the portfolio shaping, which are relatively minor businesses, will occur over the time period that we're outlining.

I do think that, if you saw the press release, that we do say as – one of the ways we're really looking to make sure that we're showing performance quickly is we're committing to our operating expenses being lower in 2019 than they were in 2018.

And that's kind of a way that we're really holding ourselves accountable for not only head count changes, but really getting after cost.

And, Jeff, one thing I really want to emphasize and it's one of the challenges when we're trying to communicate a program this significant is, obviously, the hard numbers are sitting there in the costs and the head count. And I've referenced the top 50 meeting.

Our leadership team fundamentally believes that really focusing the organization on bigger priorities and bigger bets and more substantial innovation is actually going to liberate the organization and really help it grow.

So one of the things when we talk about this program internally is really focus on, A, delivering the margin improvement that we have to deliver. But, boy, we get excited about the opportunity to really get after growth..

That's helpful. And then, yeah, I guess let me just follow up, Don, on the question or on the point you made there on operating expenses coming down next year.

Where do you think gross margins go next year and over the next couple years? Obviously, you talked about some price mix issues in imaging this quarter? We've written some notes, I'm sure others have, on kind of some of those pressures maybe continuing for a while.

And some other cost pressures on the manufacturing side, you might have it on the product mix side.

So just where do you think gross margin really move here in the next one to two to three years?.

Hey, Jeff. It's Nick. Let me take that. Thanks for the question. As you know and as Don has mentioned, we've got a high fixed cost structure.

So as we look at the performance that we've targeted in the strategic plan, I think you're going to see both gross margins and then consequently operating margins improve as we better control our operating expenses. So I don't have any specific gross margin target for you.

But if you kind of pencil out where we're going to end up for the year given our guidance of 15% to 15.5% and then the 20% and 22% target, I think you're going to see a good portion of that – I guess an even split between gross margin and operating margin. And, certainly, the savings that we've targeted fall into both buckets..

Thank you..

Thank you. And our next question comes from the line of Tycho Peterson with JPMorgan. Your line is now open..

Hey. Thanks. I'm going to try to (00:41:24) you guys out a little bit for 2019 as well. Just given that your long-term guidance is 3% to 4% in the top line, Street has you just under 3% top line next year.

As we think about portfolio transformation, are you comfortable with where the Street is? And is it going to be a product-heavy year, given that it's an IDS year or should we think about the following IDS cycles being maybe more important for you guys?.

Hey, Tycho. It's Nick. I would say that we are definitely expecting a good IDS year, and I'll let Don follow up on that. We're in the midst of our budget process, so we don't have a specific view on 2019. But as you know, with a dealer destocking of $110 million to $115 million this year, certainly, we would expect an uplift from that.

And that will certainly help our absorption levels in our fixed cost facility. And that we're also targeting OpEx being below. We should have a good year next year while we're still ramping up our top line growth rate strategies..

Yeah. And, Tycho, just – obviously, you've tracked the category for a long period of time. IDS years tend to be significant years.

The strategy we're taking right now is we're focusing on probably five to six big ideas and we're really going to drive them, which is a little bit of a different tack than we've taken in the past, where it might have been 30 or 40 things where we try to be all things to all people.

We're very comfortable that the innovations we are bringing and announcing at IDS are going to be significant. And, look, we're not going to outline exactly what they are. Obviously, we're in markets where you can tank markets in advance if you get too specific on what you're launching.

But we are very comfortable that we're going to have a really strong IDS..

Okay. And then, a follow-up on equipment. The CAD/CAM numbers out of Schein were great, up 40%. You obviously had the destock headwind. Can you maybe just talk the momentum in the underlying market around CAD/CAM? And Jeff alluded to the pricing in his question.

So can you maybe just talk on some of the strategies you've taken around pricing for CAD/CAM? And then, lastly, if I look at your comments a year ago, you've called out I think about an $8 million inventory destock headwind. Today, you're saying it was $34 million in the year-ago.

So was that just the restatement that's the difference?.

No. I think last year's destocking for Q3 was the $34 million.

Why don't we check on that Tycho? And, Don, can you answer on the pricing for CAD/CAM and/or imaging?.

Yeah. And, Tycho, if you go back to our second quarter call, we said that we were unhappy with the performance of our Technology & Equipment business, and we took a couple very specific actions; and I'll come back to where pricing fits in that. The first is, we stood up at sales force that was focused on CAD/CAM.

The second is, we launched a pretty comprehensive marketing program designed to create interest in not just CAD/CAM, but imaging as well. The, third, we worked with our dealer partners, and they've been terrific and getting their sales forces aligned, giving their sales forces the right level of incentives.

We also offered some financing and we're seeing some very positive trends underlying. And Nick mentioned in his script that – he was talking about a very positive DS World, and we had a very good DS World. So I would tell you – and it hasn't been about price.

It is realistically getting back and fundamentally delivering the benefits of chairside dentistry, which we think is transformative. I think longer-term one of the questions that we have to look at is, what is the impact of DI and CAD/CAM.

And the interesting thing is that right now we're finding that CAD/CAM is moving and we are seeing positive momentum there. And I don't think that's coming at the expense of DI. I think, there, some of the customers are beginning to segment themselves to say, look, I want to do DI and some of them want to do full chairside.

So, again, I think some of this is getting back to good old-fashioned blocking and tackling around CAD/CAM. And again, it was my first DS World. And listening to the loyalty that CEREC doctors have for this product is really impressive..

Okay. Thank you..

Thank you. And our next question comes from the line of Jonathan Block with Stifel. Your line is now open..

Hey, guys. Thanks and good afternoon. I'm actually going to apologize in advance for this question, but I really think it's important. You guys are about 30% below the EPS range for 2018 that you gave only nine months ago; and numbers have essentially come down for each of the past three quarters.

You're giving today numbers and goals that are two and four years out. And I guess what I'm asking is, why should people have conviction in those numbers? And I am asking because if you look at the numbers, I think it implies to well over $3 in earnings power in 2022, which is really compelling.

But how do you get people comfortable on the road map to achieve that? And then, I've got a shorter follow-up..

Sure. And, Jonathan, look it's a question we fully expect. And, look, I would tell you nobody is more disappointed in the movement that we've been doing with guidance than Nick and myself. So that's the first thing. The second is why should people believe us? Well, if you listen to how we're kind of laying out our KPIs.

We are laying out three, kind of, things for you to measure things along. And the first is what we kind of call activities. And we fully expect to provide transparency on these major initiatives.

Where are they? Did we deliver on our R&D portfolio? Did we deliver on the sales force effectiveness program and where are we? The second part of that is, we're really talking about non-financial metrics as we kind of go forward.

And the last issue is, we're saying that we're going to report out on seven key financials, which are margin and all that stuff along the way. In terms of what we're trying to get done? Look, on the underlying part of the business, the first thing starts with growth.

And right now, if you basically peel back our third and fourth quarter, one is an issue that we didn't comprehend when we put together our budget in 2018, which was a major change in the dealer destocking of $110 million. That was pretty significant.

The second was, as we began to stand up a centralized facility in Europe, we had startup issues at the end of the quarter. We feel that that's been resolved and that site is moving along nicely. So as you look at what has impacted our 2018, they've been very significant headwinds.

If you look at going forward, we're trying to outline some very transparent steps around organizational structure, growth initiatives that we should be able to report on and give you mileposts along the way. But you're only as good as your – as we deliver.

So without trying to quote Bill Parcells, we understand that we have to deliver on these commitments..

Okay. That was very helpful. I appreciate that. And maybe just a shorter follow-up is, something that's certainly still the case, but might be temporary loss of investors as you've got a really under-levered balance sheet and good cash flow.

But how do we think about deploying capital during this time of restructuring? Is management going to be overly focused on what you guys need to do over the next two to three years? Or can we still think about you guys executing on some tuck-ins along the way? Thanks for your time..

Yeah. Thanks, Jon. And I would say it's the latter. Look, we believe that our go-to-market capabilities are really strong. And, look, we have a lot of areas that we think tuck-ins can really help us with the technology that we haven't developed internally or help us with a solution.

So, look, I'm not going to give an exact number of where we expect to deploy cash in terms of make it available for tuck-ins versus other uses. But we are going to be actively in the market, where we can see technologies that would help us accelerate growth.

Next question?.

Thank you. And our next question comes from the line of Erin Wright with Credit Suisse. Your line is now open..

Great. Thanks for taking my questions. So how is innovation a part of these new efforts to reinvigorate growth? And you mentioned the stepped-up innovation this year and an IDS year, but can you elaborate a little bit more on the pipeline? Do you have some more meaningful launches coming up even at Greater New York? Thanks..

We're not going to do anything at Greater New York, Erin. Really the next big tranche of things will be IDS. And again, it's new to me, to be honest, because coming out of medical devices you could usually talk about the next couple years. But, obviously, in our Technology & Equipment business we have a consumer that pays attention to what we say.

And if we announce specific innovations, we have a potential to change our buying trajectory before them. So we're not going to do that. But most people tend to focus on our Technology & Equipment business. We feel pretty good that we've got some good innovations coming along in OraMetrix and our orthodontia business.

We like what's going on in some of our implant businesses. In addition to straight up innovation that's coming out of our own shop, when you look at buying technologies that we don't believe we fully deployed, like, things like MIS, we get excited.

We think that there is some real work that we can be doing in our resto business and our Preventive franchises as well. And then, the last issue near and dear to our hearts is endo. And if we look at our track record of innovation over the last decade, it's been pretty important for us to innovate in endo.

And right now, I would tell you that's a very high priority for us. So, Erin, we're looking forward to again a very, very fulsome IDS..

And how would you characterize U.S. Consumables growth parsing out specialty, as well as general Consumables? And I guess I'm focused here on the U.S., and (00:51:40) that you have visibility on the end market demand trends? Thanks..

Yeah. And while we don't give specific guidance on Consumables in the U.S., I mean, we feel the underlying U.S. business has been pretty good. Again, without quoting direct numbers, we feel our Consumables business is very competitive in the U.S. business.

And again, we think that that marketplace has been growing in the mid-single digits, mid to low-single digit numbers. And again, we feel pretty good about how we're performing in that market, in that area..

Thank you. And our next question comes from the line of Nathan Rich with Goldman Sachs. Your line is now open..

Thanks for the questions. Don, could you maybe help us think about the major buckets of the $200 million to $225 million of cost savings between head count and some of the other areas.

Just think it would help getting that additional visibility as you think about the achievability of those targets?.

Sure. Actually, I'll turn it over to Nick..

Yeah. I mean, I would say that the major buckets are obviously some level of head count reductions. Also, there is some rationalization of facilities and program management within that. I would say that they are half between kind of gross margin level expenses and then operating expenses across it.

But as Don said earlier, we are looking to rationalize the organizational structure and eliminate some redundancies within the business by having fewer business units within the two segments, and that will increase efficiencies..

Yeah. And just to amplify what Nick said, Nathan, is, look, we believe that there is a significant opportunity in terms of the RCO SBU consolidation, some other functional consolidation. So put that in the head count bucket, the second area that we're excited about is procurement.

Again, it's kind of hard to develop the really effective procurement organization when you've got SBUs in countries as the primary management point. So we think there's significant money there. And then, in some of the portfolio shaping opportunities, we believe that there are businesses that are non-core and not particularly productive.

So I would bucket it head count operational savings. And then, obviously, we're going to get a fair amount of margin lift in the accelerating growth portfolio or so..

Okay, great. And then, just one on the disruption in Europe on the Consumables side. It looks like it was slightly more than 400 basis points of a headwind this quarter.

Can you maybe just talk about the remediation efforts you put in place? And how quickly you think you can kind of get back to that more normalized growth?.

Yeah. And just for perspective, Venlo is something that we think is important for our ability to serve our customers long-term and it's a centralized activity.

If you think about that particular facility, it services some of our direct – kind of smaller direct-to-doctor businesses; and that went fine as we were transferring a lot of the work we do with our dealers, which tend to be larger orders. Moving in, it was a new technology and new process in place for Venlo.

At this point, we feel pretty good that the Venlo situation is under control. We feel very good that the facility at this point is producing at a level that it should be able to meet any demand that we see currently forecasted in the fourth quarter. And then, Nick and I are actually going to be in Venlo next Tuesday to see for ourselves.

But at this point, we feel pretty good that the situation has been remediated. The other thing that it's going to be a learning opportunity for the organization, where, okay, how do we – what are the five key things we learn when we're doing these things.

And I think it was an important trial-by-fire that I think will make us better as we really begin to look at doing some other supply chain consolidation..

Makes sense. Thank you..

Thank you. And our next question comes from the line of Steven Valiquette with Barclays. Your line is now open..

Thanks. Good afternoon, Don and Nick. Thanks for taking the question. So couple of things to think about here. I guess I'm framing this a little bit differently.

The legacy Dentsply company went through a very similar deep dive analysis about five years ago with the strategy to do some major restructuring cost savings that would also lead to a lot of margin expansion. And the company actually did achieve some of that and actually most of that margin expansion from, call it, 2013 to 2015 or 2016 or so.

But I guess the question really is that, given that Dentsply restructuring wasn't that long ago, first, is more of this restructuring related to legacy Sirona assets versus legacy Dentsply assets, although it doesn't really seem like it based on the slides? But then, number two, I guess is there still a lot of low-hanging fruit on the legacy Dentsply side of the business given that again this broad restructuring took place not that long ago? And do you run the risk of too much cutting just leading to, let's call it, unintended consequences on top line growth? Thanks..

Yeah. Thanks, Steve, and great question. It's interesting, one of the things coming in new, I get to read about all the projects, and the legacy Dentsply organization went through a relatively significant restructuring designed to do a much better job of integrating what at that time was six SBUs.

I would say it was reasonably successful, but was about halfway through about the time of the merger. And as such, some of the rationalization work that was targeted and planned on the legacy Dentsply side wasn't gotten to.

And then, all of a sudden, you basically had a company the size of the legacy Dentsply organization on top of the organization that hadn't necessarily completed the transition it needed to do.

So I tend to think that there – if the legacy Dentsply company had another 18, 24 months, I think that they would've delivered continued benefit there and it's benefit we're looking to get after now. That's the first point. The second thing is, we've really stopped thinking about the company as kind of legacy Dentsply and legacy Sirona.

And it's really interesting, one of the things that we need to start thinking about is you look at some of our specialty businesses, our Technology & Equipment businesses, there's cost leverages because we're calling on the same dentist with 10 different platforms.

And so, in my mind, it's less about how are we going to carve out savings on one side or the other. But let's take a customer approach and then let's look at what's the best way for us to understand the best relationship we have with that dentist and make sure that we're approaching it that way.

So in my mind, one of the opportunities of putting the companies together was to create a much broader portfolio that should be of a high degree of relevance to that dentist and deliver it that way and we just haven't done that.

And then, as you think about the cost savings and the reason we say 20% by 2020 and then we say, look, we want to get back to premerger levels and beyond is that we think that there's a significant amount of supply chain work that we can do. We just don't want to do that right out of the gate as we're going through kind of a commercial evolution.

So that's kind of how we think about it. A long-winded way of saying Dentsply did not get all the low-hanging fruit and that the combination of these two assets, put together, should create other opportunities for us to get after..

Okay. That's definitely some helpful color. Thanks..

Thank you. And our next question comes from the line of Steve Beuchaw with Morgan Stanley. Your line is now open..

Well, hi, and thanks for the time here. I want to try to help everybody get maybe a little bit more comfortable with the top line trajectory, maybe come at it a couple different ways. But, first, when I think about the challenges that the company has faced historically, they're actually pretty different in different regions.

We tend to focus a lot on what's going on in the U.S.

But I wonder if you could talk about the balance of improvement that you're contemplating in the top line trajectory and the extent to which they're different in the different regions, and the extent to which you think in the different regions, given their different market dynamics, the critical success factors might be more in your control?.

Yeah, Steve. Let's take things one at a time. I mean, first, we've been relatively consistent over the last nine months talking about the fact that we think developing market should be a good place for us, and we're going to continue investing in them.

I mean, if you look at the growth we've been seeing in places like Brazil and China and the model we approach there, so we think that that's a model that we can continue investing in and replicate. In terms of the different trajectories in the different parts of the world, look, there are lots of different trajectories.

But I would tell you, in my mind, there's been two things that are consistent across all the regions and the first is, we've got to deliver major innovation.

And whether it's major innovation in our Technology & Equipment business that's going to be relevant in Europe, that is going to be relevant in the U.S.; or whether it's coming up with new innovation and what we've considered like a specialty business like implants or in endo or something like orthodontia.

We don't see a huge difference in the impact that those new products could have across the board. So in our mind, there is not a regional strategy on, okay, do we need to develop a tailored North American strategy versus a Central Europe versus like emerging market.

In our mind is how do we really look at innovation that's truly relevant across the market around the world. So I realize it might not sync completely up with your thesis there.

But in my mind, if we can really get the new products and the pipeline flowing, point one; point two is make sure that we're consistently excellent in our go-to-market strategy, I think we're going to be in good shape..

And then, just building on the commentary about new products, how much do you think you can improve price and mix trends over the course of the forecast horizon with new product flow? Thanks..

Whether we improve it or arrest the decline, it's – I'll take those as two sides of the same coin. Look, the innovations that we're pushing out, we think have the potential to do very, very well in the marketplace. And we're very conscious of whether they're going to be margin accretive or dilutive.

And one of the reasons that I cited the fact that we need to change our approach to R&D and begin to focus on bigger bets is, look, we need to look across our portfolio and say what's going to have the best benefit to our top and bottom line at Dentsply Sirona as to what might be the best for our Preventive SBU.

And in doing that, obviously, if there are higher-margin products that are more relevant in areas of the world that we have higher-margin profiles, that's where we're going to be able to pick up resources and reallocate them to deliver there.

So again, I get very excited about some of the things in our pipeline and the fact that we do think that they are going to really help us on both the top line and margin basis..

Okay. Thanks, Don..

Thank you. And our next question comes from the line of John Kreger with William Blair. Your line is now open..

Thanks very much.

Don, can you maybe go back to the strategic review you guys did of the market overall, dental market? What did you conclude for longer-term dental market growth? And what did that study conclude in terms of how the market's evolving, just to give us a sense of what Dentsply needs to do to sort of be able to outpace the market long term? Thanks..

Yeah. Thanks for the question, John. I would tell you, we break it up in kind of Consumables and Technology & Equipment. We think that there are positives in the Consumables business that are offsetting some of what you may think about consolidation, whether it's in the DSO's or some of the pricing compression.

So we believe that the Consumables business is kind of a 2% to 4% relatively consistent. And again, there is positives in new products and other things that will offset what we consider, like consolidating related pressure.

On the T&E business, again, we really look at this year, and the largest market, there was a significant anomaly at the wholesale level, where we saw tremendous amount of inventory destocking. Again, I hope you hear that we were pretty happy with how the third quarter T&E business was performing.

And we think that's indicative of we've got a good portfolio of products in T&E, whether that's CAD/CAM or whether that's being more competitive in DI or instruments or other areas. We believe that business should be a 4% to 6% or potentially higher grower depending on where we are in new product.

So on an aggregate basis, we really look at the combined business sitting around 3% to 5%. And we said, both in our transcript and I believe in the press release, that we believe we ought to be able to track that market, if not outpace it. It's clearly our objective to outpace it..

Okay. Thanks. And maybe a follow-up, Nick, for you.

What is your thinking about destocking at this point? Are we done? As you think to 2019 and beyond, is the inventory in the channel appropriate? Or do we need to be thinking about more of that in 2019?.

Yeah. The short answer, John, is that our expectation is that this will be a good year to get the level of inventory in the channel to where demand at a retail level corresponds with demand at the wholesale level. So it's obviously a significant reduction this year. $110 million to $115 million, and that's been trending pretty well.

So we feel pretty good about getting this behind us..

Okay. Thank you..

Thanks, John..

Thank you. And our next question comes from the line of Yi Chen with H.C. Wainwright. Your line is now open..

Hi, sorry for that. Thank you for taking the question. So my question essentially relates to the revenue growth.

What do you see in revenue growth essentially reversing?.

Well, Yi, the answer to that – I mean obviously, as we said, the dealer destocking will help us certainly with revenue growth going into next year on the Technologies & Equipment side. And on the Consumables side, we believe the Venlo issue as certainly getting behind us and we'll be able to see a positive growth on the Consumables side as well.

So, clearly, the expectation is positive revenue growth into next year..

Perfect. Thank you so much for that..

Sure..

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Don for any closing remarks..

Okay. Well, first, we appreciate that we went a little bit long today. But, obviously, we had a lot to talk about. So thank you for your time, and we look forward to reporting back as time moves on. And again, we mentioned in our transcript, at this point, we are not planning on doing a Investor Day at this point.

So, again, hope everyone has a good evening and we appreciate the time you spent with us. Thank you very much..

Thank you all. Bye..

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a wonderful day..