John Sweeney - Dentsply Sirona, Inc. Donald M. Casey Jr. - Dentsply Sirona, Inc. Jorge M. Gomez - Dentsply Sirona, Inc..

Tycho W. Peterson - JPMorgan Securities LLC Jeff D. Johnson - Robert W. Baird & Co., Inc. Steve Beuchaw - Wolfe Research LLC Erin Wilson Wright - Credit Suisse Securities (USA) LLC Nathan Rich - Goldman Sachs & Co. LLC Allen Lutz - BofA Securities, Inc. Brandon Couillard - Jefferies LLC Trevor Brown - Stifel, Nicolaus & Co., Inc.

Elizabeth Anderson - Evercore ISI Jason M. Bednar - Piper Sandler.

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2020 Dentsply Sirona Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, John Sweeney, VP of Investor Relations. Please go ahead, sir..

Thank you, operator, and good morning, everyone. Welcome to our third quarter 2020 earnings conference call. I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www.dentsplysirona.com.

Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we'll make certain predictive statements that reflect our current views about future performance and financial results.

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

In our – in today's conference call, our remarks will be based on non-GAAP financial results.

We believe that non-GAAP financial measures provide investors useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business.

Please refer to our press release for the reconciliation between GAAP and non-GAAP results.

And with that, I would now like to turn the call over to Don Casey, our Chief Executive Officer, Don?.

Thank you, John, and thank all of you for joining us today. We hope that all your families are keeping safe and healthy. Before starting our presentation, I wanted to first acknowledge the hard work of the Dentsply Sirona team around the world. It starts with our supply chain.

This group does not have the ability to work from home, yet has consistently delivered and served our customers without interruption. Beyond our supply chain, I would also like to thank our entire team globally.

They have shown remarkable resilience during these past 8 months and have remained committed to our customers and delivering against our priorities. It is a privilege to be part of this team. During our call today, we would like to cover four areas. The first is to outline our third quarter results.

The second is to provide some details on how our business is performing as dental offices have reopened around the world. We will also provide some context on how we are looking at the short-term environment in light of the continued uncertainty around the impact of the resurgence of COVID. And finally, we will outline our priorities going forward.

Overall, we are pleased with the company's performance in the third quarter. The dental industry has historically demonstrated resilience over the years and continues to show sound fundamentals. Over the past several months, the essential nature of dental care has been shown as dental offices reopened and patients returned.

During the quarter, the improving market positively impacted revenues. Further, our performance reflects the actions we took to manage during the pandemic and respond quickly as market demand returned. Executing during the pandemic has also highlighted opportunities we have to accelerate parts of our restructuring.

This has allowed Dentsply Sirona to perform at a higher level. Moving to slide 6, we summarize Q3 2020 results. Second (sic) [Third] (00:03:57) quarter revenues were $895 million, down 8.8% on an organic basis. This is a significant sequential improvement versus quarter two and reflects the impact of the recovering dental market.

Our strong cost containment efforts helped deliver operating income of $197 million, up 14% versus prior year. This resulted in an EPS of $0.67, up 17.5% versus year ago. We are also pleased with our operating income margin which came in at 22%, up 410 basis points year-on-year.

To provide the details of our performance for the quarter, I will now turn the call over to Jorge..

Thank you, Don, and good morning, everyone. Overall, we are very pleased with the robust recovery in the dental industry in the third quarter, certainly compared to what we experienced in the second quarter.

While there were exceptions in certain countries, for the most part, dental offices were open and dentists were able to ramp up procedures in their practices throughout the quarter. We are pleased to see that the steps we're taking to improve our business performance have resulted in positive financial outcomes.

At the same time, we remain cautious on overall industry trends as we move through the fourth quarter. This is due to a high degree of COVID-19-related uncertainty across the globe. Looking at our 2020 third quarter P&L on slide 8.

Starting with the top line, organic sales were down 8.8% versus last year, which is a significant improvement as we compare to the second quarter performance when we experienced a 50% year-over-year decline. Gross profit was $506 million or 56.6% of sales, a level that approaches the gross profit margin rate we had in the prior year quarter.

The margin rate reduction of 30 basis points versus last year was primarily the result of product mix changes and increased inventory costs due to COVID-19. This was partially offset by both temporary and structural cost savings initiatives. SG&A of $309 million was down a substantial $67 million or down 17.7%.

SG&A as a percent of sales declined 450 basis points to 34.5%. The reduction in SG&A was the direct result of decisive actions we took to manage our cost base during the pandemic, and also the result of the continued execution of long-term productivity improvements we began implementing last year.

Some of the cost actions implemented in the second quarter were temporary and have been phased out. For example, at the end of the third quarter, the vast majority of our employees had returned to work. In addition, volume-driven expenses moved in line with higher sales volume towards the end of September.

One item to note that improved SG&A in the quarter was the reduction of $8 million in bad debt expense as a result of continued improvement in collection efforts. As a result of the sales recovery and cost actions listed above, operating income increased by 14.3% to $197 million.

Net interest and/or expense was $13 million in the quarter, up $11 million year-over-year, driven primarily by higher debt balances. The effective tax rate in the quarter was 20.3%, down from 24.8% in the prior year, primarily as a function of the changes in the US versus non-US pre-tax income mix delivered this quarter.

EPS was $0.67, an increase of 17.5% versus Q3 2019. Before I move to segment performance, let me provide an update on two key enterprise-wide initiatives. First, we are pleased to report that we are on track with the plans we laid out last quarter to exit the traditional ortho and traditional lab businesses.

We're expecting to complete these actions by the end of this fiscal year. Our portfolio-shaping activities make our overall business stronger by allowing us to focus efforts on areas that provide the greatest growth potential and return on investment.

Second, regarding our structural cost savings target of $250 million, we have achieved approximately $50 million in the first nine months of 2020, following savings of $89 million during 2019. Our estimates for the total benefit and investment requirements remain unchanged. We expect the cost of the restructuring to be approximately $375 million.

To date, we have spent $285 million, of which $110 million is non-cash. Moving on to slide 9, where we review our third quarter Consumables segment performance. Reported sales were at $391 million, down 9.3% on an organic sales basis, roughly in line with the overall sales performance of the company.

All product lines experienced a decline in the quarter, but the most impacted areas were Laboratory and Preventive. In the third quarter of 2019, we announced that we were changing our promotional strategies. We have followed the new approach consistently over the last four quarters.

We are now more focused on building relationships with dentists, delivering clinically relevant products, and at the same time, giving a strong incentive to dentists to try our new products. As part of this shift, we are working directly and with our dealer partners to emphasize promotional programs that incentivize retail demand.

We believe that longer term, this retail-focused programs will deliver improved sales performance. Consumables operating income margin was 25.3%, a significant improvement as compared to the steeply negative margins we experienced in the second quarter, and is slightly lower than last year.

As we have previously discussed, Consumables is a relatively fixed cost business, and the sharp sequential margin improvement was primarily a function of increased demand and, secondarily, as a result of cost improvements. Moving on to slide 10, where we highlight our Technologies & Equipment third quarter performance.

Net sales were $504 million, down 5.7% as compared to the prior year. Organic sales declined 8.5%. During the quarter, our Healthcare business continue its – on its growth trajectory. Equipment & Instruments was flat, as the impact of the pandemic was offset by sales of our new Axeos imaging system.

Digital Dentistry declined due to a difficult year-on-year comparison. Please remember that T&E revenues increased 11% in the third quarter of 2019, primarily as a result of a strong CAD/CAM sales, in advance of DS World. In addition, COVID-19 and the change of DS World into a virtual event are factors to consider.

Third quarter T&E operating income margin improved from 19.6% in 2019 to 21.8% in 2020. T&E margin was favorably impacted by our cost savings actions. On slide 11, we show our business performance for the third quarter on a regional basis. US sales of $319 million declined 5.4% compared to the prior year.

This represents a decline in organic sales of 6.4%. Of note, we were pleased to see growth in our Consumables business in the US. T&E decline as a result of a very difficult comparison in Digital Dentistry, as we saw strong shipments of CAD/CAM systems in advance of DS World in the third quarter of 2019.

European sales were $351 million, down 2.9% compared to last year. Organic sales were down 7%. In Europe, we saw better performance in our T&E business as compared to Consumables. The UK, France, and Spain were the biggest contributors to the European revenue decline, mainly due to lingering COVID-19-related challenges.

Rest of the World sales were $225 million, down 14.6%, with declines in both Consumables and T&E. The South American market and, in particular, Brazil continues to be severely impacted by COVID-19. China and Japan were markets that also experienced COVID-related declines in the quarter. On slide 12, we show our Q3 cash flow performance.

We had a strong cash flow from operations of $207 million, as compared to $159 million in Q3 2019. The increase in cash flow was driven by the higher level of earnings and effective working capital management across the board. In terms of capital expenditures, we spent $21 million, slightly down from $23 million in Q3 2019.

Free cash flow was $186 million, up 37% as compared to $136 million in the prior year. In the quarter, we paid $21 million in dividends, bringing cash returned to shareholders to a total of $205 million in the first nine months of 2020.

We finished this quarter with a strong liquidity available of $2.4 billion, comprising $1.3 billion cash on hand and committed credit facilities of another $1.1 billion. The efforts we took during the year ensure that we have ample liquidity available to invest and grow the company as the economy recovers.

As you are aware, we are not providing any guidance on 2020 due to the ongoing uncertainty in the market. But I do want to share some thoughts on how we are thinking about the rest of the year.

We are encouraged to see the recovery in third quarter trends in the global dental industry, and we are pleased that our cost and productivity improvement actions are driving margin expansion. At the same time, there are certain considerations that can impact the potential range of outcomes in the fourth quarter.

First, we have some lingering concerns regarding the impact from COVID-19 on our global operations. Second, it is likely that pent-up demand boosted third quarter sales and revenue per visit. Third, certain temporary cost reduction initiatives ended within the third quarter, and sales volume-driven expenses began to increase in line with demand.

Finally, our 2019 fourth quarter benefited from strong sales of CAD/CAM systems due to a highly successful DS World and the US upgrade program. Our sales increased 27%, and total company sales increased 8.4% in the fourth quarter of 2019. As a result, Q3 2020 financial performance alone cannot be used as a basis to project fourth quarter outcomes.

Despite the uncertainty, we are encouraged by the structural improvements we're implementing and their impact on our ability to increase competitiveness and achieve our long-term financial targets. With that, I will now turn the call back to Don..

Thank you, Jorge. And now, let's move to slide 15. Two years ago, Dentsply Sirona announced a comprehensive restructuring program designed to accelerate growth, improve margins, and simplify the organization. In 2019, we made solid progress in achieving our restructuring objectives, and that progress has continued in 2020 despite the pandemic.

As we look at the objectives set two years ago, we are more convinced than ever that the plan and the targets are the right one. We have delivered on some of the milestones to date, and are confident that we will continue making progress against the remaining areas and deliver value for our shareholders.

The highest priority of the restructuring was to accelerate growth. As part of that, our leadership team has spent a lot of time looking at our innovation process and has made major changes. One of the most important shifts we made is around R&D. We now really focus on customers and procedures rather than on individual products in siloed SBUs.

This sets Dentsply Sirona up to take full advantage of our broad portfolio that includes a category-leading installed base of digital diagnostic assets, an expanding treatment planning offering, and essential products across a broad range of areas.

In another change, our R&D spending is now done across the company as a portfolio, allowing us to focus on innovation that is more substantial and sustainable. Over the last 18 months, we have seen several major new product launches. Highlights include Primescan and Primemill.

We have also delivered improvements in the consumable areas with Surefil one, Palodent 360, and our digital denture program. We are also seeing a good response to the Astra EV Implant. In the third quarter, we made continued progress on the innovation front. On slide 16, we highlight the Axeos 3D imaging unit.

This is a large Field of View 2D/3D imaging system that is a practice builder for dentists. It has clear 2D image quality and a large 3D Field of View for ortho, implant, maxillofacial surgery, and upper airway analysis. Axeos is compatible with more than 200 practice management and planning software system. And of course, it is SureSmile compatible.

On slide 17, I'm highlighting the benefit we are currently seeing from yet another innovation, our SureSmile clear aligner system. SureSmile has a robust clinically-driven digital treatment planning platform. It has an open architecture and accepts standard files from a range of intraoral scanners.

The software is seamlessly integrated with Primescan, and we feel Primescan is an extremely accurate, fast, and easy-to-use system. And you can plan clear aligner cases by integrating 3D imaging, enabling full root-to-crown planning of teeth movement.

The software is efficient and many dentists report that they may not need to refine the treatment plan once it's approved, saving time at the planning stage. We package SureSmile treatment planning and aligners with a full suite of support from clinical educators, clinical specialists, and digital lab specialists.

And we provide training to dentists through our clinical accelerated programs so that they can get up to speed quickly and confidently and start efficiently doing clear aligners. Our team is ramping up our clear aligner manufacturing footprint to meet the expected level of demand.

It will be needed as SureSmile is currently on a solid trajectory, and we expect to see a run rate of over $100 million in 2021.

The example of SureSmile is important for Dentsply Sirona, as it shows how we think about taking advantage of our unique digital footprint that includes digital scanning and X-ray imaging assets to offer seamless, easy-to-use solutions for our customers.

In addition to these proven products, we believe we have an outstanding new product pipeline that will positively impact 2021 and beyond. But growth is not just about innovation. Over the past 18 months, a comprehensive sales force effectiveness program has been initiated in key countries.

It is focused on allowing Dentsply Sirona to deliver holistic solutions to our customers. This overhaul involves everything from targeting to messaging and even revamping our sales to cash process. As Jorge mentioned earlier, marketing initiatives have also been scrutinized and changed.

Dentsply Sirona is now working with our partners to put increased emphasis on programs that drive retail demand. In the future, programs like One DS will differentiate us in the marketplace.

These programs, coupled with investments in our digital product portfolios, digital commercial capabilities, and growth priorities like SureSmile set the company up for success well into the future. Our next restructuring goal was to expand our margins.

A highlight has been centralizing key functions like the supply chain, which proved its worth during the challenges presented by the pandemic. Further, the company has invested in initiatives in areas like finance, IT, and HR to help create scale and leverage. There's been major progress around reshaping our portfolio.

Last quarter, we announced the exit of traditional ortho and the analog lab businesses. All of these activities allow the company to operate with better scale and efficiency that is critical to propel margin expansion in the future.

Our team is proud of the progress we have made during the past two years, but also understands that there remains a lot of opportunity. Indeed, we have used the last several months to accelerate activities designed to help the company operate at a higher level. Jorge outlined how we're looking at the near-term future in his remarks.

Regardless of the short-term impact of COVID, though, we believe that we have a reason to be optimistic about our future. As mentioned earlier, this is a fundamentally strong category with excellent prospects for growth in the future. The results from this quarter demonstrate that Dentsply Sirona has the ability to manage through short-term setbacks.

As we look forward, our management team has developed and executed against a comprehensive plan designed to deliver on our priorities of growth, margin expansion, and simplifying our business. Our entire team is confident in our strategy of delivering integrated scaled solutions to our customers that take advantage of our unique portfolio.

And finally, Dentsply Sirona has the financial strength and global scale to succeed in the dental market. Ultimately, teeth do not heal themselves, and we believe Dentsply Sirona has an important role to play in helping our patients and our customers all over the world with bettering their oral health and helping them smile.

With that, we will now turn it over to the operator for questions.

Operator?.

Our first question comes from Tycho Peterson with JPMorgan. You may proceed with your question..

Hey, good morning. I want to start with one for Jorge on the margins.

I know you don't want to comment a lot on the fourth quarter, but I'm just curious on kind of how you think about the run rate of operating margins from here, given that you've hit the 22% target?.

Yeah. Good morning, Tycho. Very good question. Obviously, we are very pleased with the results that we accomplished in Q3. They show the actual outcome of all the work that we're doing. When you look at, specifically at Q3, you have to think about savings and the structural changes like in two different categories.

In the third quarter, obviously, related to COVID and volume challenges at the beginning of the quarter, there were a lot of temporary cost savings actions that we took. And in fact, that actually began in Q2 when we implemented furloughs, short week frameworks, and actions like that in all of our regions.

And so, the nature of those savings are temporary – is temporary in nature. And we are seeing how some of those expenses are coming back. Because a lot of them are a function of volume. And we experienced a very good rebound during Q3, as the numbers show. So, we expect those temporary cost actions to be phased out.

A lot of them have been phased out already, and they will come back in Q4 and beyond. So, some of those expenses will increase. There were some structural changes that were completed within the third quarter. They will remain. There are sustainable savings that we have achieved. And so, we are not providing guidance for Q4 for obvious reasons.

But I – what I would tell you is, we are very pleased with the trending of our margins. If you go back to last year, two years ago, the trend is very clear. And long term, we remain committed to the financial targets that we have indicated. COVID could change the timing of that a little bit.

But fundamentally, we are on the same – on a good path to achieve the margin expansion that we have committed to achieve in the next couple of years..

Okay. And then, Don, on the demand side, you noted the quarter was boosted by pent-up demand and more complex procedures. I'm wondering if you can kind of comment on that trend. And then, any monthly commentary? Last quarter, you talked about June revenues down 40%; July, flat.

So, I'm just curious if there's any monthly commentary you can provide? And then, anything on functional versus elective procedures in terms of the recovery?.

Yes. Actually, I'll go reverse, Tycho, for you. The functional stuff has done pretty well. I mean, if you look at endo and you look at some of the basic rest of stuff, that seems to have come back pretty well.

And again, we've referenced a couple places that – you look at the mix, I mean, we're seeing complex procedures, which tend to be more implants or endo. And if you need a root canal, you kind of need a root canal. So, that stuff has kind of returned pretty quickly.

You have some stuff like prevention where you see kind of a diminishment of Cavitron and look at some of the cleaning and that kind of stuff, just doesn't necessarily – it has not come back as quickly because there's a little bit of concern about aerosol and whatnot.

I would tell you, the – how we're seeing the fourth quarter play out – and again, it's a little bit difficult right now because you're seeing different lockdowns and whatnot. But so far, the trend around patients making appointments seems to be solid. We don't see a huge change.

But, again, it's really, really hard to see exactly how much in the third quarter was a benefit of mix, how much of that – and when I say mix, there was more complex procedures done – how much of that's going to trend out in the fourth quarter, particularly as we've seen some of the big five countries in Europe really kind of begin to lock things down.

So, we're not going to give you real specific comments – June, July, August, September or October. But, look, we felt that the business returned nicely in the third quarter. We're waiting to see, again, how the kind of second wave impacts us across the globe. But so far, we're comfortable with what we're seeing develop..

Okay.

And then, before I hop off, can you just break out the ortho and lab contribution? I had a few people asking me what the organic growth would have been backing that out?.

Yeah, Tycho, it was interesting. This quarter, the actual exclusion of those two dispositions for the purpose of calculating organic growth actually made our organic growth worse than reported growth, from a sales perspective.

That is because, in the quarter, after we announced that we were exiting these two businesses, actually sales were very positive. There was a significant amount of demand as customers and dealer partners order a lot of product in preparation for the exit of those businesses.

So, most of the – or a big chunk of the delta between reported and organic was driven by those two businesses. But it was an interesting result this quarter. Typically, it goes the other way around. But in this case, organic was a little bit lower than reported because of that dynamic..

Okay, thank you..

Thanks, Tycho..

Thank you. Our next question comes from Jeff Johnson with Baird. You may proceed with your question..

Thank you. Good morning, guys. Jorge, just wanted to follow-up on that point you just made.

I just want to make sure I'm understanding what you're saying is that the two divested businesses or the businesses you plan on divesting, those were excluded from the organic growth calculation? That's what a lot of investors, I'm sure, are asking Tycho and myself today. So, just want to confirm, you excluded that from the down 8.8% organic..

That is correct. So, our practice is once we announce the exit from a business or a disposition of a business, then, in that quarter, we start making the organic calculation excluding those assets, obviously, in both periods, this year and last year. So, they were excluded this quarter..

Yes, fair enough. And then, Don, maybe a two-parter for you, but I'm sure without saying much on 4Q, you're not going to bite on kind of 2021, either.

But fair to assume, I would think, that 2021 revenue relative to 2019, still going to be down relative to 2019 just given some of the macro headwinds and kind of consumption headwinds, would you agree with that? And two, on the cost savings.

So, it sounds like you've got about another $100 million of incremental cost savings over the next couple years to come out. How does that pace out over the next few quarters? And kind of same question, 2021 operating margin versus 2019, maybe you'll have a little more liberty there than in revenue, with those cost savings.

Do you think you can claw back that 18.4% operating margin you delivered in 2019 if revenues are somewhere flat to down 10% off those 2019 levels? Thanks..

Thanks, Jeff. A couple of things. First, I'm not going to bite on 2021. Thanks for giving me the credit upfront on that. But your – the comparative base we're using is 2019 right now. The – again, the mix for us is really going to be how do people come out of the second wave kind of as we look at that.

And that is the big piece that we're kind of working our way through right now. I mean, the one thing I'll tell you, we're increasingly optimistic that we're not going to see dentists' offices shut down, which we – obviously, that was a big feature of what went on in 2Q. In terms of – you're accurate on the cost savings.

I mean, we had said initially it was kind of in the $225 million range and we took that up last quarter, and we feel pretty good that we're going to be on track to deliver those cost savings.

And if you actually look, Jeff, at how they metric-ed out 2018, 2019, and kind of what we're talking about in 2020, we're kind of – they're not exactly even, but it's kind of a continuous improvement process.

So, if you want to extrapolate on how we're thinking about that is, hey, look, this year we're going to anniversary $60 million in cost savings in the quarter. And that's kind of how we're looking at it going through in 2021. The cost savings, I would tell you, are, in my mind, somewhat independent of revenue.

In that there's things that we have to do structurally – how are we thinking about head count, how are we thinking about process, how are we thinking about the timing of when different functions could centralize. So, we feel that we're pretty much on target. And again, it'll be a consistent kind of improvement process over 2021, 2022.

Jorge just kind of mentioned – look, we had laid out the target of 22% in 2022. Whether that target is exactly hit, given COVID and given where revenues potentially could fall in 2021, it's still a little bit of a question for us. I would tell you, we're really committed to that 22% number. And obviously, look, we hit it this quarter.

And I think we're trying to tell you guys that there have been excellent structural improvements, but there were some stuff that was like temporary work – short work week, furloughs and other things that ramp down as we bring people back, and you're starting to see revenue. I mean, we had a $900 million revenue quarter.

There's – we pay commissions and we pay dealers and all that stuff, so some of that comes back. But the 22% margin is, in our mind, absolutely, A, attainable; B, it's really something we're committed to. And again, what the exact timing is, that could get pushed a little bit but we think we're going to get there..

Thank you..

Thank you. Our next question comes from Steve Beuchaw with Wolfe Research. You may proceed with your question..

Hi. Good morning. Thanks for the time here. One and then a quick follow-up. The hardest part of the model for us to sort of get our heads around, just on a month-to-month basis, is the Rest of World because it is so diverse and because there are sort of different lockdown dynamics there.

I wonder if you could talk – even though I know you don't want to give 4Q exactly – just about how you see the progression of growth in 4Q exiting 3Q, and if you see any signs of encouragement that things there that could be stabilizing? And then, I do have a follow-up..

Yeah. Good morning, Steve. Let me start, and then I'll have that – Don complement the question. I think, in Q3, outside the US, there was a mixed bag. A lot of the issues were related to lingering COVID concerns. You have markets, for example, like the UK that was severely impacted by COVID. You have markets in Latin America, Brazil in particular.

And then, a few countries in Asia that were impacted. So, that's – those are where I see the concentration of issues so far. The recent announcements with respect to lockdowns, hard to forecast how that's going to impact the numbers. So far, we have not seen any new things as it relates to those lockdowns, but it's too early to tell.

So, that's kind of the trends that we're seeing in international markets. There are other markets, for example, the German area, our DACH region, that includes Germany and a couple of other countries. Those markets have actually performed relatively in line or well, relative to the rest of the company..

Yeah. And the only thing, Steve, I'd point out is, what is your mix of countries and what is your mix of sales there? One of the things that we are noting in, obviously, the US with DS World and the timing of that and moving that to a virtual event, that'll certainly color how we think about the mix between Q3 and Q4.

But the other thing that we're kind of going on is how much technology and equipment is going to be sold in Q4 Rest of World, as people lean into additional lockdowns and whatnot. So, again, we're not trying to be evasive.

It's just – at this point, we're – there's a couple vectors that are a little bit hard to understand, just the mix of Consumables, T&E, and the mix of Rest of World and exposure to – of different parts of the business to different parts of, whether it's Asia, whether it's Brazil, or whether it's something that's going on in Europe..

Okay. That's certainly fair. And then, just a couple quick clarifications. One, Jorge, I know there was a dialogue back on the 2Q call, appropriately, about the impact of supply and inventory on 2Q.

Would it be fair to say that the level of inventory in the supply chain was not a factor, one way or another, for 3Q? And if it was, could you help us understand whether or not inventory or supply levels might have been a factor? And then, Don, it'd be helpful if you could just spend another minute sort of kind of commenting on the decision to put the $100 million number out there, which you seem to pound a little harder here, as it relates to SureSmile for next year.

What have you seen in terms of the progression as you really concentrate on the digital side of ortho that seems to have you a little bit more optimistic there? Thank you..

Yeah. With respect to inventory, let me make a couple of macro points. I think, first, in situations like the one that all companies have been dealing with in the last several months, reducing inventory is an important goal from a cash flow management perspective.

When I look at our inventory, internal inventory, you can see our cash flow numbers, right? There is a – we have generated a lot of cash and a lot of it has come from the good job that the supply chain team, our internal supply chain team, have done lowering inventory levels. So, I think that is an important thing too, to keep in mind.

I assume many companies are trying to do that as well. Second point is, for us, what really, really matters from a market and financial standpoint is we want to make sure that the end demand, that retail customers are satisfied from a supply perspective, that service levels are good. And we are seeing that.

So, from a retail sales perspective, based on all of the reports that we get from our channels, we're seeing good, good performance on a retail basis. And so, as a result, it is possible that inventory levels in the network have come down when you look at those two things.

When you put those two things together, it is possible that inventories in the networks have come down as a result of those macro points that I have made. Long term, and we talked about this last quarter, we are very much focused on retail and making sure that wholesale and retail shipments, over time, get as close as possible.

I don't think that is – we are there right now, but that is our goal, that those two numbers get as close as possible. In the meantime, there could be gaps and ebbs and flows, but nothing that really impacts our long-term financial trajectory..

Yeah. And just to build on that final point that Jorge is making, about a year ago, we started talking about we really wanted to launch programs like the One DS program that focus on let's create retail demand. And as such, we said that there were going to be fluctuations in inventory that Jorge is referring to.

And as we continue to work through that and you see elimination of things like quarter-end buys, yeah, it's possible, Steve, that you've seen a reduction in inventory. That's both COVID-related as well as some of the stuff that we've done.

But ultimately, again, we're pretty comfortable with how things are performing at retail, and eventually, that all smooths itself out. In terms of SureSmile, it's interesting. We've been doing a lot of work on SureSmile. And we bought OraMetrix close to two years ago. And we had to do some work around that.

I mean, we really wanted to make sure that we had a scalable supply chain, that we really advance the state of the software, and we did that with SureSmile 7.6.

And then, basically, not quite a year ago, we launched the One DS program that put a real emphasis on how are you going to get our installed digital assets, whether it's Primescan or whether it's Omnicam, how do we integrate SureSmile seamlessly with that.

And then, with One DS, really provide the general dentists with some incentives to try SureSmile, and the process is working. And as you guys know well from us or Invisalign and other people, it's pretty formulaic; how many starts did you get and things begin to roll through.

So, what we're seeing in the third quarter and the fourth quarter give us confidence to start talking about a run rate in excess of $100 million as we get out of 2021.

And again, the focus – one of the reasons we felt very comfortable getting out of the traditional ortho business was because we were seeing the beginnings of what we're very excited about with SureSmile, and we've seen that validated in the third quarter.

And obviously, again, we can see starts and we can see trials that give us optimism in the future. And the important part for us is, okay, are we seeing a dentist just try this once? No, we really want to see a dentist do three, four, five cases. And once they get to that three, four, five cases, it becomes relatively predictable.

So, that's what we're seeing on SureSmile right now, and we're excited about that as a growth pillar for the company..

Okay. Thanks so much for the color..

Thanks, Steve..

Thank you. Our next question comes from Erin Wright with Credit Suisse. You may proceed with your question..

Great. Thanks.

Can you detail a little bit about the decline in Digital Dentistry? Was it consistent with your internal expectations in this sort of environment? Is anything changing from a competitive landscape standpoint, or is it just the tougher comp? And can you detail a little bit of the feedback on Primescan? Are practitioners opting more for the standalone Primescan offering versus full chairside, particularly in this sort of environment?.

Thanks, Erin. And I'll take this one. First, I – we feel very good about what's going on in retail with CAD/CAM right now. We feel that Primescan, Primemill are moving at retail. And I think, if you look at some of the commentary other people have made, I think we're consistent with that. That's the first thing.

Second, the thing that really kind of blurs what's going on right now is we had a DS World that was sitting in the late Q3, and as a result – and we had a really, really good DS World a year ago.

And so, we're working off a tough comp there, where you had both our partners get very, very aggressive about what was going to go on at DS World and it worked out very, very well. So, first, I would tell you, retail, very comfortable with what's going on.

We're very excited with the reception of Primemill, and Primescan is really doing very, very well in the marketplace. So, that's point 1. Point 2 is it's really the comp that's obscuring what's going on. And again, as you see our dealer partners report, they feel very good about what's going on. It's a validation of what we see on a retail basis.

Right now, I'd tell you, we're pretty comfortable that we're competing effectively in the DI space with Primescan. It's been an area of emphasis for us. But I will also tell you that, with Primemill, we're now selling full systems that really – and we're getting an excellent reception to this idea of One Visit Dentistry in a COVID environment.

You're taking people out of the system where it might be a two-, three-, four-visit situation, if it's – if they're going to do it conventionally with a crown versus, hey, we can – particularly, with the speed of Primemill, we're in a position where you can sit there and say people can come in and they can have everything taken care of within an hour.

And that's been well received in a post-COVID environment. So, again, generally very happy with what's going on with Primescan and, again, competing effectively in DI. Primemill gives us a real leg up in full chairside as well..

Okay. Great. And then, on the DSO front, can you detail kind of your experience there? Have they performed better than standalone practices in the COVID environment, and has anything changed in terms of your strategy at all on the DSO front just during the pandemic? Thanks..

Erin, the DSOs did really well in the pandemic. I mean, there's a little bit more certainty. And, obviously, when you talk about some of the larger DSOs, they were in a position to – let's get our offices open and might have had access to PPE a little bit earlier than some of the individual practices. It doesn't change our strategy.

Look, we feel that we're competing effectively in the DSO space. I think we – it's an area that we have an opportunity to do even better in the future as we begin to really focus on this idea of procedures.

When we talk to the large DSOs and kind of the mid-sized DSOs, it's all about, right now, how – what is procedure time, what can my dentist get done, can a general dentist do kind of entry-level specialty procedures, whether that's implants, whether that's endo, or whether that's clear aligners, and what can you do, Dentsply Sirona, to help us get there; and we feel we're very competitive in that offering.

So DSOs, I think, came back a little faster. I think that situation has equaled itself out as PPEs become generally available. And we look at it as a long-term opportunity for us..

Okay great. Thank you..

Thanks, Erin..

Thank you. Our next question comes from Nathan Rich with Goldman Sachs. You may proceed with your question..

Good morning. Thanks for the questions. Jorge, could you maybe provide a bit more detail on the decline in the Rest of World business? It sounds like Brazil was challenging. I would have thought China and Japan maybe would have done a little bit better, given they're maybe a little bit further along in terms of dealing with COVID.

So, just any more color that you have there would be helpful just as we think about these markets going forward..

Yeah, good morning, Nathan. Yeah, as I said before, if you go down kind of a (00:49:32) specific market, obviously, Brazil is one – is a trouble spot. The UK has been also experiencing a lot of challenges from a COVID perspective.

Specifically, with respect to China, it's obviously a very big market and the performance in that market is not consistent across the board. There are some categories that have been more impacted than others.

And so, when you think about the impact or growth in China, you have to take into account the product mix that companies have exposure to in that market. In our case, the categories where we are, say, over-indexed were more impacted by COVID. And that is the case also in probably a couple of core (00:50:25) markets in China.

There are also areas in Eastern Europe that have been impacted. The – and then, as I said before in a prior question, the DACH region for us actually performed well relative to the areas – regions (00:50:48) of the world.

That help?.

Yeah, that's helpful. And then, Don, maybe just a quick follow-up on DS World. Obviously, moving virtual this year, you kind of have talked about the tough comp. A lot of the upcoming trade shows also going virtual.

Can you maybe just kind of talk about how you see that changing the selling dynamics as you kind of adjust to this new environment?.

Yeah. Thanks, Nate. DS World – the thing we love about DS World is it's, obviously, a very concentrated selling event. So, we have partners there, they're bringing their sales force, we're bringing our sales force. And obviously, we're creating an event where....

(00:51:34).

...8,000 – last year, 8,000 dentists were there live..

Yeah, yeah..

What we're seeing with the virtual DS World, we're getting good reception to it..

Yeah, yeah..

I don't think we're going to see the concentrated selling event that you would have seen when we're out in Las Vegas. So, we're looking at, A, what's attendance going to be? We think it's not going to be the same number of people attending over the course of – this year, the virtual DS World is a week-long program.

So, we're not going to get quite as many people and there's not going to be, in our opinion, as – but we'll see – as immediate a reason to go buy. So, we tend to see – we think that the underlying demand is very, very good. Closing these specific sales, it may be a little bit more gradual than what we have seen in the past.

So, again, we're all adopting to the virtual world. I mean, the good news is, there's not the expenses associated with it, and we're going to see probably a more normalized demand curve.

One of the challenges for the supply chain is, when we're going to go have a big DS World, obviously, it creates some peaks and valleys in our supply chain, which we don't have to deal with. But we'll learn this year.

I mean, between DS World and, obviously, next quarter, you're going to have IDS, which is not going to be as a well-attended event, and a lot of that is moving virtually as well. So, we're going to learn over time. I would tell you, Nate, over time, we – I expect that to equal out. You might see a much more level loading of what demand looks like.

And the thing that we're really looking at – and we can see orders and we can see how that's trending – we feel really good about how Primescan and Primemill is performing right now..

That's helpful. Thank you..

Thank you. Our next question comes from Michael Cherny with Bank of America. You may proceed with your question..

Good morning. This is Allen in for Mike. Is there any indication that the pent-up demand that you saw in 3Q is carrying into 4Q? Basically, is there anything to call out there? Thanks..

Yeah. I think it is a very hard assessment to make. I think pent-up demand was a big factor in Q3. Going into Q4, really hard to predict. There might be a little bit, but probably not of the same extent – to the same extent that we saw in Q3..

Great.

And then, just anything you can say about the confidence level of dentists today versus where it was about three months ago around capital spending?.

Pretty – first, Allen, thank you for the question. Pretty good. I mean, it's interesting, the thing that we're seeing on a global basis is that tech – and you can see it in our performance, technology and equipment did pretty well.

Look – and we had actually thought, based on what we had seen in prior downturns, that T&E would have come back a little bit more slowly.

And that hasn't been the case So, as you start seeing pandemic-related stimulus, one of the things you see are tax incentives on a global basis that may lead to people having incentives to buy technology and equipment toward the end of the year. That's particularly in Europe that becomes an important issue.

And what we're seeing in the US is, again, I had mentioned to Erin, we're really happy with how this idea of single-visit dentistry is playing out.

And I do think one of the offshoots of the pandemic – so, you had dentists really kind of go down April and May, and a lot of the dentists really used that time to – first, judging by all the CE, we saw, a tremendous amount of clinical – continuing education, part 1. Part 2 is, they really assessed their practice.

And the conversations that we've had subsequent to that really tell us that there's a pretty significant group of dentists that recognize, hey, we're going to – what we learned in the pandemic and what we've learned subsequent, where you're going to have to think about patient flow a little bit differently because of infection protocols, hey, chairside – single-visit chairside dentistry makes a heck of a lot of sense.

Second issue is, we're excited that they're seeing, hey, we really need to move to Digital Dentistry because that's going to allow us to pick up time. Rather than do impressions, having somebody shoot a scan with a Primescan that's going to take less than a minute, that's a timesaver. And they're looking for timesavers in the post-COVID world.

And the last thing, we mentioned in a couple of places, Axeos, which is our new wide Field of View imaging system. And we're seeing good pickup on that.

And we feel that – okay, you do see people, why would somebody go out and buy an Axeos? Well, either (00:56:46) they're really looking at as a practice builder that lets them get into things like implants, things like clear aligners, particularly when you take a digital scan and you combine it with a 3D image with SureSmile, you get real root-to-crown movement.

So, we've been happy with the performance of the technology and equipment area with us. It came back a little bit faster than we thought. And what we're seeing on a global basis, there's good healthy demand for it..

Thank you..

Thanks, Allen..

Thank you. Our next question comes from Brandon Couillard with Jefferies. You may proceed with your question..

Thanks. Good morning. Don, would be great if you could just touch on the implant business there. I'd be curious how your portfolio shaped up relative to some of the data points we've had from peers in the last few weeks..

We feel pretty good. We believe we performed basically at market. I think, obviously, Straumann has done very, very well. And I think, looking across the rest of the market, we all performed pretty similarly, part 1. Part 2, if you – from where we sit right now, we feel pretty good.

First, I would tell you, our portfolio is better today and is getting consistently better. Astra EV, to us, was an important launch and we're seeing a good response to it. I think, in general, the implant business has returned.

If you kind of were planning on getting a set of implants, you have – people have, by and large, followed up with their dentists and done that. And that's one of the things we're talking about when you see more complex procedures and you see the overall mix benefit from that.

And we look at – implants has performed in line with the rest of our company. So, that's the first thing I'd tell you. Second, as – if I look out over the next two years and where we want to be, is outperforming on implants – outperforming the market. And we think we've put the plans in place, part 1.

Part 2 is we feel very good about what our portfolio looks like over the next two years that we're coming. So, implants, to us, is an opportunity..

Thanks. And then, a quick follow-up on SureSmile.

The – relative to the $100 million run rate number you pointed to by the end of next year, is that a US-only figure? And how do we think about the geographic rollout from here and what contributes to your achieving that target?.

We sell SureSmile in multiple countries. Obviously, the US is where the momentum has picked up the fastest. And again, that's – we feel that the system of let's focus on our CEREC base, let's get things like One DS out there, are really important. We think that model can be replicated in multiple countries around the world.

I – the $100 million is inclusive of multiple companies – multiple countries, excuse me. We – and again, we're – I think we're in 10 countries now. But again, I would say, the pickup – where the pickup has been the fastest is where we've got the model right, and the model in the US is one that we're very happy with..

Thanks..

Thank you. Our next question comes from Jon Block with Stifel. You may proceed with your question..

Hi. This is Trevor on for Jon. Thanks for the question. Overall, there wasn't much of a difference in the declines across the two segments. But if I take your comment about US Consumables having positive organic growth, this implies T&E was a lot weaker than Consumables in the US, while the opposite might have been true in Europe and Rest of World.

So can you comment on any differences in the trends you're seeing across the different geographies, and maybe to what extent the timing of DS World and the comp there might have played a factor? Thanks..

Yeah. Good morning, Jon (sic) [Trevor] (01:01:00). Yeah, you're correct with respect to consumables. On the T&E, I don't think there were any major differences between regions. As we indicated in our prepared remarks, and I commented a couple of times, the comps versus last year are very difficult, given the very strong Q3 2019 we had.

Our sales and shipments in advance of DS World were very strong in last quarter. In the US, we had the – also a number of activities that really turbocharged the sales in – of CAD/CAM equipment.

But across regions, when you kind of adjust for that type of specific activity to Q3 last year, we feel really good about the retail sales that we are experiencing with CAD/CAM. Those products continue to sell really well. And I think the performance is similar across most geographies..

Okay, great. And a quick follow-up on margins. Just anything significantly different within the segments? Overall, it's pretty similar to 3Q 2019 levels for the total business.

But just looking within T&E and Consumables, is there anything to call out there?.

No. I think from a margin perspective, all of the savings that we are achieving, especially the structural cost savings, those are applicable to both segments. You can see how we – our gross margin, for example, recovered pretty well in the third quarter. SG&A improved substantially versus last year and, on a ratio basis, sequentially.

And those – that is work that is happening across the board. The only one difference between those two segments, from a margin perspective when we talk about this last quarter, is the fact that the Consumables segment tends to have a much – a higher fixed cost base. And so, it's a lot more sensitive to changes in volume.

That's kind of the only structural difference, but productivity improvements and other actions are impacting favorably both segments..

Great. Thank you..

Thanks, Trevor..

Thank you, Trevor..

Thank you. Our next question....

Operator, next question, please..

Thank you. Our next question comes from Elizabeth Anderson with Evercore. You may proceed with your question..

Hi. Good morning, guys. Qualitatively speaking, I just wanted to understand, as we look at sort of the equipment outlook, I know, obviously, you have a tough comp in the fourth quarter, from DS World and the follow-up last year.

But how do we think about like how you're structuring like trade in demand? I know that you had obviously started the US trade in demand program.

Like, how do we think about that in terms of Europe, and particularly Germany, for 2020 as we go forward?.

Yeah. Thanks, Elizabeth. And we hear you about Friday's Part 1 (01:04:28). But look, I would tell you, we're at a very early stage on the trade in programs. At this point, we've basically done them in North America and we haven't rolled that out to all of Europe or of Asia Pac at this point.

So – and a year ago, that was a function of keeping up with demand. Now, we feel pretty good about our supply chain, and we can begin to execute it. Obviously, coming right out of the pandemic, we were not 100% sure how things would've played out. So, we look at that as we're in early stages, part 1.

Part 2, yeah, the comp – the DS World comp is one that is an obvious feature of how we are thinking about third quarter and fourth quarter. Obviously, we know what goes on at retail, and we were happy to see one of our partners report that CAD/CAM sales on a retail basis are very encouraging.

So, obviously, when you get a bolus of pre-shipments a year ago, heading into what was a very, very big event for us, that's going to skew things. So, we've mentioned a couple times today, we're really laser-focused on what's going on at retail. And we can see, obviously, somebody doesn't just walk in and say, hey, I want to buy a Primescan.

It's – in terms of number of leads in a funnel and whatnot, again, we're – we feel that we're seeing positive retail trends in CAD/CAM versus prior year..

Okay. That's helpful.

And just, philosophically, how are you handling new product launches re IDS this year with the more virtual format?.

Yeah, it's really funny. IDS is obviously something we work years in advance, and that's going to be the big event where we're going to roll out as many new products as we can. And a year-and-a-half ago, two years ago, when we were doing this, it was a huge event.

So, what we've done with our entire team is sit there and say, okay, there's not going to be an IDS. So, how do we really take advantage of things that we're doing? So, first, I'll tell you, we're expanding DS World beyond the US. We're looking at a DS World this year in Israel, Russia, and in Germany.

It's going to be new to us, and we're going to figure out how that stuff works. The second is we're going to be very concentrated. Right now, Axeos, for us, is a big launch on the T&E side. You've got Primescan, Primemill still kind of running hard.

Surefil one is something that we're putting a lot of emphasis, along with Palodent 360, as kind of the consumable lead thing. And as we get into 2021, we're going to pick one or two products and really drive that across the entire DS sales portfolio in a country, whereas before we'd be a little bit chopped up.

So, what we're going to do is really – we're trying to create some DS Worlds beyond the US, part 1.

Part 2 is we're going to really kind of narrow and focus and then push it across our entire – all the sales bags in a specific region so that we get good – really good traction there to – in our mind, to kind of help us overcome the fact that there's not a big IDS event there.

And then, it's really interesting, with the Surefil one, we're doing kind of a global launch there. The virtual receptions we've been getting to the launches, where we invite KOLs in, have been really good. So, we're – we've seen that in a couple countries where we've launched it, and we create an event.

So, is anything going to replace IDS exactly? Probably not. We believe that we put in place a combination of things that'll help mitigate any real downward pressure on it..

Okay. That's helpful context. Thanks so much..

Thank you. Our next question comes from Jason Bednar with Piper Sandler. You may proceed with your question..

Hey, good morning. Thanks for squeezing me in here. Just really, first, follow-up from me. Don, on SureSmile, just curious if you could just expand on where you're at right now with the number of docs that are using the system.

And then, what you're seeing and expecting with respect to the formula of the utilization ramp and new doctors coming on to the system here over the coming quarters in order to hit that $100 million run rate target you're talking about for next year..

Yeah. First, thanks for the question, and it's a good one. I'm not going to give you the specifics in terms of absolute number of doctors.

But I would tell you, the progress that we've been made and the reason you see us get pretty confident is we've been able to watch the impact of One DS World and targeting the CEREC community with this, and it's a progression.

And the inflection point you see is, once a doctor has done more than three procedures, we really kind of consider them reliable and you can see things scale. So, to be honest, you can actually do the extrapolation back to kind of figure out how many doctors we're talking about.

I would tell you, one of the things we're really excited about is we have a pretty large installed base of Primescan and Omnicam. And I would tell you – I don't know if we want to go with baseball analogies now that the World Series is over – we're in very early innings on what we think the upside potential of talking to that community is..

All right. That's helpful. Thank you. And then, just wanted to come back to one other thing you mentioned in your prepared remarks, Don, the new sales force effectiveness program that's been implemented.

Just wondering if you could expand on what markets that's impacting? And then, maybe just unpack a bit more what's being done here on a go-forward basis and maybe how that compares to the sales model you had previously? Thank you..

Sure. Thanks, Jason. Right now, SFE, we've put in the – in North America. It's in most – we're not in all of Europe; but right now, UK, France, Germany. And when we think Germany, we tend to think of it as DACH, which is Austria and Switzerland. So, we feel very good that we have executed there. China is something we've kind of kicked off.

I would say, we're looking at completing that in 2021. And Japan will also follow that model. And then, the interesting thing is if you – let me give you a little bit of evolution of how we've been thinking about things. We had an SBU-driven model.

So, for instance, if you were in the US or you were in Germany or you were in China, say, like the implant sales forces would all report to the implant group and the endo sales forces in the US or China or Germany would report to the endo group, so there was no concept of, in a country, that there would be any scale and leverage.

What we've been doing with the SFE program, and when we talked about in our restructuring that we were simplifying things is, hey, we're going to go to a regional format of demand creation and commercialization. And as a result, we now – like taking the US, we have one VP of Sales. And we're moving to that format across the board.

We're fitting the number of specialty sales forces so that we can create bigger bags that have broader reaches. And we've spent a ton of time on what is the exact targeting, what is our messaging, and what does the frequency look like, and what kind of ROI measures that we want to put in there.

And then, we've executed Salesforce.com across the entire world.

So, one of the reasons I dropped that in our prepared remark is, when we talk about the restructuring and everyone goes to where's the margin, where's the cost, I mean, in our mind, the upside of simplification is we feel a significant improvement that'll be consistent – we think we'll consistently see upside to that as we get the SFE program rolled out all around the world.

It's how we want to deliver Dentsply Sirona to our customer..

Great. Thank you..

All right. Well, thank you, everybody, for joining us today on our third quarter 2020 earnings conference call. We look forward to having follow-up calls with many of you later on today. And thank you very much. Have a good day..