Good day and thank you for standing by. Welcome to the DENTSPLY SIRONA Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Andrea Daley. Please go ahead..

Thank you, operator and good morning everyone. Welcome to the DENTSPLY SIRONA second quarter 2024 earnings call. Joining me for today’s call is Simon Campion, Chief Executive Officer; and Glenn Coleman, Chief Financial Officer.

I’d like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of 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 may make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties.

Our most recently filed Form 10-K and any updated information in subsequent SEC filings, lists some of the most important risk factors that could cause actual results to differ from our predictions. Additionally, on today’s call, our remarks will be based on non-GAAP financial results.

We believe that non-GAAP financial measures offer investors valuable additional insights into our business’ financial performance, enabled the comparison of financial results between periods where certain items may vary independently of business performance and enhance the transparency regarding key metrics, utilized by management and operating our business.

Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today’s call will be available on the Investors section of the company’s website following the call. And with that, I would now like to turn the call over to Simon..

Thank you, Andrea, and thank you all for joining us this morning for our Q2 2024 earnings call. I will start by providing an overview of our Q2 performance, give an update on the previously announced transformation work, and share information about new initiatives and investments we have been planning.

Then Glenn will cover Q2 financial results and our full year 2024 outlook. I will finish with a brief strategic operating update. Starting on Slide 3. Our second quarter revenue of $984 million was unfavorably impacted by lower sales in our Connected Technology Solutions segment.

As expected, capital equipment continued to experience pressure, largely but not exclusively due to macroeconomic conditions. Other factors included some pricing degradation and weaker-than-expected performance in certain major markets.

We delivered organic sales growth in the other three segments, Essential Dental Solutions, Orthodontic and Implant Solutions and Wellspect HealthCare. We were pleased to see double-digit growth in aligners despite some headwinds, which we will discuss later.

Our continued focus and investments in Wellspect Healthcare enabled us to deliver another quarter of strong growth. For the full year, we are revising our outlook based on first half performance, FX, evolving market dynamics and the continued macroeconomic headwinds. Eighteen months ago, we announced a restructuring plan to transform DENTSPLY SIRONA.

We also communicated that this would be a journey. With our Phase 1 initiatives complete or well underway, we are ready to advance to Phase 2 to build on our progress to date and further advance our transformative agenda to improve efficiencies and drive profitable growth.

Although the macro environment has impacted the sales outlook for the global dental market, we remain committed to continued assessment of our business, adapting our organization accordingly, enhancing our efficiency and execution capabilities and investing in high-return categories, all with the goal of driving sustainable EPS growth, as we highlighted during our Investor Day.

As we said in our press release, we have identified $80 million to $100 million in annualized structural and operational synergies that are incremental to our recently completed $200 million restructuring program. We have a clear plan to achieve these synergies and expect to realize them in the next 12 to 18 months.

Both our Phase 1 and Phase 2 restructuring plans are fundamentally shaping our company. We designed these plans to improve our operational performance and drive much higher customer engagement, increase alignment, drive process and discipline, and strategically position DENTSPLY SIRONA to win.

Since announcing Phase I, we have moved very deliberately in many areas, including reinvestments in key geographies commercially, competency as clinical education, simplifying our manufacturing, distribution and product footprint, driving an intentional focus on quality, refining our new product development processes and implementing a single ERP system.

These cost-saving initiatives and reinvestments were instrumental in reestablishing positive and constructive relationships with key stakeholders of our company, including customers and investors.

We remain confident that these Phase 1 initiatives will have a lasting impact, improving performance to drive long-term shareholder value and contribute meaningfully to our bottom line through 2026 and beyond. As we discussed in Q1, we have been planning incremental measures to better position ourselves to achieve our profitability and EPS target.

While we always believe there were additional opportunities to shape and structure our company, we prioritize the Phase 1 operational initiatives.

We expect these new initiatives will not only improve our financial performance, but also refine our organizational structure, enhance our business processes and better align roles and responsibilities to support our objectives.

Specifically, I will discuss shortly how we are executing on new investments to reshape our structure, enhance relationships with our customers, and further strengthen our competitive position and accelerate innovation through disciplined R&D pipeline management.

Additionally, we are evaluating further strategic investment opportunities, though we will not disclose these details today for competitive reasons. We are laser-focused on simplifying our global structure by consolidating product categories within each global business segment to better align our portfolio with our customers’ needs.

In doing so, we are also simplifying our regional structure and reevaluating our marketing efforts across our business. We have assessed and reevaluated lower-performing businesses and geographies, and have decided to selectively exit certain countries, which we expect to complete in 2025.

We expect these exits to have a $5 million impact to revenue with minimal impact to the bottom line. We also initiated plans to reduce external spend and G&A costs by consolidating our vendor and supplier base while tightening spend control.

In addition, we have developed a plan to consolidate service and support activities that, in turn, will enhance efficiency through streamlined tools and processes, which are enabled by our ERP transformation, though I’ll note the time line for this particular project extends beyond 18 months.

As we’ve previously shared, our survey results tell us that we do not have major product gaps in our portfolio and that our company is uniquely positioned to be a partner of choice for customers around the world. These are not our words, but the words of our customers.

We will continue working towards better leveraging our portfolio to drive improved performance where we have lagged the market for years. Unlocking the value inherent in our portfolio requires us to think differently, to invest strategically and to create our own demand.

So what does it mean to create our own demand? We must develop closer, more meaningful relationships with all our customers. While we have made progress here, we must continue to assess and take opportunities to advance this crucial strategic objective, when and where appropriate.

Our global sales force, as you know, is a critical part of our commercial infrastructure. Moreover, the geographic distribution of dental practices, particularly in the U.S., can make reaching customers challenging and, in some cases, result in marginal return.

To augment our efforts and improve our coverage more cost effectively, we plan to increase investment in our own sales channels. As a first step, we have recruited a sales leader with a strong track record of standing up inside sales organizations around the world.

By the end of Q1 2025, we intend to recruit, hire, train and deploy, at least 100 DENTSPLY SIRONA inside sales reps in the U.S. This team will complement our field-based sales teams by connecting with customers who do not see our field-based reps as frequently as we would like.

They will focus on generating demand and funneling it through the appropriate channel, either our direct sales forces in endodontics and orthodontics for example, or through our dealer partners. More specifically, we see an opportunity to increase our in-office aligner business, particularly with orthodontists where we are underpenetrated.

Our studies demonstrate a compelling value and technology proposition, leading us to increase investments in commercial and technology assets.

To enhance the effectiveness and performance of our commercial and service teams, we also intend to invest in technology that facilitates a seamless customer service and engagement experience, alongside implementing an advanced CPQ system.

Furthermore, many of our direct customers would prefer to do business with our company through a robust e-commerce platform. With that in mind, we have developed a detailed plan to upgrade our offering through increased functionality and capability and are now moving into the execution phase.

Our plan incorporates many discrete areas of enhancement which we expect will improve the performance of this channel and customers’ experience with our company. We expect most of these initiatives will go live by the end of Q2 2025. And this leads us to our relationships with distributors.

The degree to which we partner with distributors varies around the world. We value these partners in all geographies, and we have worked hard to strengthen those relationships. That said, changing market and competitive dynamics have impacted our relationships with certain distributors, and we are adjusting accordingly.

For example, some not only distribute for us and others, but in certain areas, they compete with us directly. Others execute in manners that do not wholly align with our strategic objectives.

We have and will continue to invest significantly and strategically across our businesses, introducing new products and software into the marketplace and training our distribution partners to represent our portfolio to our customers.

Through these activities, we enable distributor success, which, in some cases, is not adequately reflected in our current terms and conditions with them. With this in mind, we recently issued a nonrenewal notice to Patterson Companies under our equipment distribution agreements in the United States and Canada. We did not make this decision lightly.

It reflects our desire for improved delivery and communication of the value proposition we bring to dentistry, including our evolving digitally connected ecosystem.

Our current contract remains in effect as we engage in ongoing discussions, which we hope leads to an agreement that aligns more closely with the evolving environment and our strategic objectives.

To help us achieve the Phase 2 cost savings and advance our strategic initiatives, we have made several organizational and leadership changes, including merging North America and Latin America into one commercial team now called the Americas region.

Given their experience and track record, we are confident that the regional commercial leaders now in place and drive the necessary changes to address our operational realities, improve organizational health, and better position DENTSPLY SIRONA for future growth.

Furthermore, we announced today that as part of our leadership changes in connection with Phase II, Andreas Frank will be leaving the organization. Andreas made many meaningful contributions in helping us establish our path forward and in executing the work we have undertaken.

These changes are intended to increase alignment between our global business units and our regions, thereby creating positive momentum in our revenue trajectory, which we anticipate will improve the leverage of our other margin accretive activities.

Finally, we have been diligently improving processes in R&D to ensure that we are working on the right programs at the right time, programs that focus on unmet clinical and workflow needs for our customers.

Our ongoing assessment has identified $19 million outside of the Phase 2 initiatives that we plan to reallocate into programs tailored to those needs, and with return dynamics that can allow us to alter the return trajectory of our total innovation pipeline.

Specifically, we are increasing investments in orthodontic software to improve the dental professionals’ experience, accelerating DS core capability and making further investments across our connected technology platforms. Now let’s circle back and talk about our $3 EPS target.

As we stated when we announced this objective, achieving this target assumes an improved macroeconomic environment.

Since announcing the target, we’ve continued to see pressures globally, particularly in markets where we have a significant presence, such as Germany and Australia, as well as higher interest rates persisting across many of our major markets, including the U.S.

Despite the challenges already noted, the contribution of our Phase 1 activity to our $3 target is meaningful and within our control. This EPS target remains a north star for us, and we expect Phase 2 to help our path to the $3 EPS target.

We also believe, as you heard today, that it’s crucial to continue investing in our business to drive profitable growth and remain good stewards of our organization as we laid out at Investor Day.

In a nutshell, and while we are still fine-tuning our numbers, some of these initiatives will go towards helping us achieve the $3 EPS target, while the remainder will go towards improving our competitiveness, which we expect will drive even greater value.

Before I hand the call over to Glenn to discuss the financial results in more detail, let me add that we had a strong cash flow quarter, resulting in over $100 million in cash becoming available. We plan to return this to our shareholders through additional share buybacks in Q3 of this year.

And I’ll highlight that in total, we now plan to return about $380 million to shareholders this year through share buybacks and dividends. Now over to you, Glenn..

Thanks, Simon. Good morning and thank you all for joining us. Today, I’ll provide more detail on our second quarter results and an update on our full year 2024 outlook. Let’s begin on Slide 4. Our second quarter revenue was $984 million, representing a decline of 4.2% versus the prior year quarter.

On an organic basis, sales declined 2.3% as foreign currency negatively impacted sales by approximately $20 million or 190 basis points with the largest impact coming from the weakening of the Japanese yen versus the U.S. dollar.

On a constant currency basis, three of the four segments posted organic growth in the quarter, highlighted by double-digit growth in aligners and Wellspect HealthCare. These improvements were offset by declines in CTS and but we continue to experience the effects of challenging equipment market conditions and competitive pressure.

EBITDA margins contracted 30 basis points mainly due to a decline in gross margins, which was largely driven by the impact of lower volumes, pricing and unfavorable product mix in our CTS segment.

In the quarter, a larger proportion of our CAD/CAM sales came from Primescan Connect, which has a lower gross margin profile than our other Primescan offerings. This is not a new trend, but one that has become more pronounced. Adjusted EPS in the quarter was $0.49, down 4% from the prior year due to lower sales and a higher tax rate.

Operating cash flow of $208 million doubled over the prior year due to favorable timing of cash collections and receipt of a foreign tax refund. Free cash flow conversion was 155% compared to 65% in the prior year. In the second quarter, we repurchased $150 million of shares at an average price of $27.85 and paid $33 million in dividends.

As Simon mentioned previously, we intend to repurchase $100 million of shares in Q3 and plan to do so without increasing our leverage given the strong cash flow performance in the quarter. For the full year, we now plan to return approximately $380 million to shareholders through a combination of dividends and share repurchases.

We continue to maintain a strong balance sheet with cash and cash equivalents of $279 million on June 30. Our Q2 leverage ratio remained stable at 2.7x and we plan to end the year with a leverage ratio slightly lower than current levels. Let’s now turn to second quarter segment performance on Slide 5.

Starting with the Essential Dental Solutions segment, which includes Endo, Resto and preventive products, organic sales increased 1.5%, driven by steady patient traffic in Europe, partially offset by lower volume in the U.S.

Our new Endo motor, X-Smart Pros drove increased demand in Europe and Japan in Q2 and recently received 510(k) clearance to launch in the U.S., which is now planned in Q3. Shifting to the Orthodontic and Implant Solutions segment. Organic sales grew 4.6% with double-digit growth from aligners, up 11%.

SureSmile, our professional aligner brand grew 6%, driven by double-digit growth in Europe. SureSmile also saw accelerated sales growth in Japan we’ve recently made investments to expand our footprint and coverage. Lite, our direct-to-consumer aligner brand grew 16% over the prior year quarter.

During the quarter, legislative changes required us to adjust our go-to-market model in certain states. Given the evolving legislative and regulatory environment, we now expect Byte to grow approximately 15% for the full year compared to our previous estimate of more than 20% growth.

Implants and Prosthetics grew low single digits in the quarter, driven by strong implant growth in China, partially offset by declines in the U.S. and Europe. Our value implant segment was flat in the quarter as growth in most markets was offset by the impact of Turkey suspension of all imports from Israel.

On the premium side, growth in our EV family of implants and prosthetic solutions outpaced declines in legacy brands. Supporting our commitment to clinical education, in Q2, we held our Implant Solutions World Summit in Miami, hosting over 600 implant professionals from 25 countries.

Wrapping up our dental performance, CTS, our Connected Technology Solutions segment saw organic sales increased 4% sequentially, but declined 16% versus the prior year quarter. We saw double-digit declines in both E&I and CAD/CAM as the demand environment for equipment remains soft due to macro headwinds and higher interest rates in most markets.

Declines in imaging equipment and treatment centers were also partially driven by a tougher comp versus the prior year quarter.

While we anticipate the equipment market will remain challenging through the second half of the year, we expect our current and planned actions, including an upcoming digital equipment launch to improve our performance in the second half. We look forward to sharing more with you about this launch in the near future.

We’ve all seen very good adoption on DS core registrations, which continue to grow, and we now have over 27,000 unique users as of quarter end, representing 37% growth compared to Q1. Moving to Wellspect HealthCare. Organic sales grew 11.7% exceeding our expectations.

We saw growth across all regions, and we continue to benefit from new product launches, market share gains, and an initial stocking order from a new distributor. In the second half, we expect the well spec growth rate to moderate to the mid-single-digit range. Now let’s turn to Slide 6 to discuss second quarter financial performance by region. U.S.

organic sales declined 0.6% due to lower imaging equipment volume and lower wholesale volumes in EDS. On a retail basis, EDS sales were approximately flat in the quarter. U.S. CAD/CAM grew low single digits.

Distributor inventory levels decreased sequentially by approximately $16 million, consistent with normal seasonality compared to a $23 million sequential decrease in the prior year quarter. We expect U.S. CAD/CAM distributor inventory levels to fluctuate quarter-to-quarter and be roughly flat by the end of the year compared to current levels.

Turning to Europe. Organic sales declined 2.6% due to lower CTS volume across the region as a result of prolonged recessionary trends, particularly in Germany, most notably affecting the demand for equipment. In Q2, we began to deliver units of Orthophos SL, our relaunched 2D and 3D imaging line.

While we’re pleased with the uptake of the relaunch, we expect it will only partially offset the macro headwinds and competitive pressures in the second half of the year. The decline in CTS were partially offset by growth in EDS and Wellspect Healthcare both of which benefited from new product launches.

Rest of World Organic sales declined 4.3% in the quarter as robust growth in China for Endo in implants was offset by soft demand for equipment in Japan, in Australia and New Zealand. With that, let’s move to Slide 7 to discuss our updated outlook for 2024.

We are revising our full year outlook based upon first half results, anticipated additional FX headwinds, market dynamics and our expectation for prolonged macro challenges. Our July customer survey, which included approximately 2,000 responses, confirmed what external data indicated about the market and demand dynamics.

And we believe it’s prudent to take a cautious view through the remainder of the year. Several key markets showed a dip in patient traffic, including the U.S., France and Spain.

While customers expressed an interest in innovations that can improve their workflows, they also reported that they plan to delay capital investments in the near-term, consistent with the ADA data trends. At current FX rates, we now expect full year net sales to range from $3.86 billion to $3.90 billion.

We expect organic sales to be down 1% to flat compared to our prior estimate of flat to up 1.5%. Moving to profitability. Our outlook for adjusted EBITDA margin of greater than 18% remains unchanged from our prior outlook.

With these updates, we expect 2024 adjusted EPS to be in the range of $1.96 to $2.02, representing growth of 7% to 10% over the prior year. For the third quarter, we expect sales to increase low single digits on an organic basis and declined low single digits on a reported basis compared to the prior year.

Sequentially, we project gross margin to improve slightly in Q3 but declined year-over-year. We anticipate third quarter adjusted EPS will be down mid-single digits year-over-year, primarily due to a higher tax rate. And with that, I’ll turn the call back over to Simon..

Thank you, Glenn. Moving on to our strategic update, starting on Slide 8. We remain confident in the strategy that we have laid out. Digitalize our company, win in high-growth categories create a high-performance culture, enhance and sustain profitability and meet our stated financial objectives.

As we noted this time last year, we had several areas that we wanted to focus on in 2023, 2024 and beyond to drive this agenda. These included work on our foundational initiatives, designing a winning portfolio driving network efficiency, redefining our ERP landscape and executing our restructuring.

Let me now provide you with a brief update on our progress. We are advancing our SKU optimization work and expect to eliminate almost 50% of our endo and restorative SKUs by the end of 2025.

We anticipate having the majority of this completed by the end of this year, starting with the non-revenue-generating SKUs, while we work towards migrating revenue-generating SKUs in 2025. Our supply chain team continues to seek opportunities to improve our network performance. We have recently closed another U.S.

distribution site and announced plans to close another U.S.-based manufacturing site. We have been driving towards a Q3 commencement of an initial ERP rollout in Europe for several months. I am pleased to inform you that tomorrow, August 1, we will go live with SAP 4HANA in the UK.

We have completed an extraordinarily robust set of tests and simulations and will now shift our focus to a go live in North America in the latter part of 2024 with other implementations to follow. Today, we have clearly articulated Phase 2 of our plans to transform DENTSPLY SIRONA.

We have demonstrated our ability to deliver on such objectives with our success to date in Phase 1, and we are confident we can deliver on these new initiatives and investments as we strive towards making DENTSPLY SIRONA the preeminent partner for dentists, hygienists, and practice owners around the world.

Now let me close with a few remarks on Slide 9. Last year, we committed to taking decisive action and this was not a singular statement in time.

We want to capitalize on the opportunity that the dental industry affords an organization like ours, and we believe that the actions we have announced today, as well as those we took in Phase 1 will continue to drive efficiency and position us well in this evolving market.

We will continue to regularly assess our business, take decisive action and pivot as needed to improve our company and its performance particularly with respect to revenue growth, margin expansion and EPS.

Today, you’ve heard us expand on further decisive action that we are taking to not only aid our path to our $3 target but to also improve and increase our proximity to our customers. To recap, we ended Q2 experiencing continued pressure on our capital equipment business.

Our implants business in China has progressed well while we continue to invest in the U.S. business and do expect growth in the back half of 2024. Our ortho business continues to be our fastest-growing portfolio globally notwithstanding the previously mentioned regulatory environment for Bytes in the U.S.

Our new product launches, particularly in endodontics and Wellspect have done well for us and we look forward to sharing more information with you at 2024 progresses. And with that, I will open it up for questions..

Thank you. [Operator Instructions] The first question comes from Brandon Vazquez from William Blair. Please go ahead..

Good morning, everyone. Thanks for taking the questions. Maybe first, I’ll focus a little bit on macro. I mean it’s something that’s on everyone’s minds these days, and it seems like in certain areas, it’s deteriorating a little bit. So maybe can you just spend a couple more minutes talking about the specific segments.

Is this broad-based or is this kind of equipment specific where you’re seeing macro worsening? And what’s kind of the exit trajectory of macro conditions, as we’re going into the back half of the year now for these segments?.

Yes, Brandon, this is Glenn. I’ll start. I think, first and foremost, we not seeing a worsening trend in terms of the macro environment. I think on the equipment side, certainly a challenging environment. It’s been challenging for the last several quarters.

The biggest challenges for us continue to be Germany, parts of Asia, including Japan and Australia, and the U.S. market. So I wouldn’t say it’s gotten any worse, but certainly, when we look at the equipment market, it’s a challenging market. On the consumables side, I would say the patient traffic has been pretty stable.

We have seen a bit of a decline in some of the specialty procedures and elective procedures. So aligners and implants as an example, in the U.S. market that was confirmed also with our external survey that we do. And so those are overall some of the trends that we’re seeing. But Simon, maybe you want to comment as well..

Yes, good morning, Brandon, and I think we noted previously that for some of those specialty procedures, patients actually finance their treatment. So when you have a continued inflationary environment, they are less likely to finance those procedures and some of the details from the survey reaffirm that this past quarter..

Okay, thanks. And a lot of other updates to hit on, I’m sure other analysts will get to, but I’ll maybe focus on the other top inbound and discussion I usually have with investors, which is if macro is performing a little bit worse today, guidance has to come down a little bit. I know Simon, you were touching on this 2026 EPS target.

Help us frame out what macro needs to happen in order to get there still we’re tracking a little bit behind that now.

What needs to happen in the next 2 years to still hit that 2026 EPS target in terms of macro? And should we maybe be thinking of that one-third macro in the EPS bridge as something that has come in a little bit lower at this point? Thanks, guys..

Yes. Thank you, Brandon. As we noted at Investor Day and each quarter since our assumptions around that target were predicated on a more normalized macro environment, and we have still yet to see that, albeit the reports about interest rates continue as well, but it’s going to take more than one of those.

What you heard us describe today was a balance between aiding our past to the target, but also taking decisive steps to invest in the areas, to continue the transformative journey that we are on, to invest in orthodontics to invest in a new inside sales team, which will drive and create demand to invest in e-commerce, and to streamline our organization.

So while satisfying some of our investor needs and desires internally as well, we are also extraordinarily focused on transforming this company into a company that provides long-term shareholder value by investing in the high-growth categories that we laid out at Investor Day..

And Brandon, I would just add that the two-thirds of that bridge that is in our control, we are on track to delivering. We’re executing against those plans.

So obviously, the macro piece and getting back to a normalized macro environment, looks to be more challenging, but that’s why we’ve announced some of the additional actions that we’re taking today and as we move forward to continue to drive towards that $3 EPS number..

Thank you. [Operator Instructions] Our next question comes from Kevin Caliendo from UBS. Please go ahead..

Thank you very much. This is Dylan Finley on for Kevin.

Just honing in on some of those comments about your non-renewal of the agreement with Patterson for equipment, I guess from here, does it make sense to work with another distributor? Or is this a pivot in model entirely in your go-to-market strategy there and then secondarily, any context on the timing of when this current contract expires? Thanks..

Good morning Dylan, it’s Simon. distributors we partner with globally are extraordinarily valuable to us. And we feel we are extraordinarily valuable to them as well. We have been discussing Patterson for some time about our relationship. And we felt that this was an appropriate time to begin negotiations about renewing contracts, etcetera, etcetera.

And given the value that we bring to them, given the new products that we introduced, etcetera, etcetera. So we very much hope that we get to an agreement, a new agreement with Patterson that is more reflective of the environment we’re in and of the value that we create.

And – but for now and for the next 12 months, the current contract remains in place, and we will continue to partner with them..

Thanks. And then just as a follow-up. No change expected to have you deal with them in terms of your consumables.

This is exclusively focused on the equipment that you distribute?.

That is correct. And just as a reminder, Patterson does the distribution of equipment in both the U.S. and Canada..

Alright, thank you. [Operator Instructions] Our next question comes from David Saxon from Needham & Company. Please go ahead..

Great. Good morning, Simon and Glen. Thanks for taking my questions. Maybe I’ll start with Glen on margins. So it looks like first half EBITDA margin is about 17.2%. Obviously, you’re reiterating the above 18% guidance for the year.

So can you just walk through the bridge to getting second half closer to 19%, I think what’s implied? How much of this new restructuring program kind of helps out in the back half – and what other factors kind of can help drive that margin improvement?.

Thanks for the question. If you look at our EBITDA margin progression here, we grew sequentially about 70 basis points from Q1 to Q2. to 17.5%. I would expect we’ll see another sequential improvement in Q3 to around 18% based upon some of my color that I gave as part of my prepared remarks, and then about 20% or even a little bit north of that in Q4.

So clearly, the hockey stick is going to be in Q4, and a lot of that is going to come from lower OpEx expenses and all the cost reduction efforts that we’re doing from both our previous restructuring plan. Now we’re seeing the full benefit of those actions, coupled with some of the newer actions that we have outlined this morning.

So our OpEx is expected to come down, did come down in on Q2, an absolute basis, that will continue to happen in the back half of the year. And then we do expect a slight improvement in gross margin in Q3 and then another improvement in Q4. And so that’s the progression of margins for the rest of the year..

Okay. Great. That’s super helpful. Thanks. And then maybe this is for Simon, the first time in just on CTS. So it sounds like E&I is still facing some challenges. You have some unfavorable mix in CAD/CAM going to Primescan Connect. You talked about some improved execution expected in the second half.

I guess, how should we think about full year 2024 growth at this point? Is it closer to down double digits? And then with interest rates obviously impact demand. So with a potential rate cut in September, how does that impact how you think about the level of demand.

Will that be enough? Or do we need to see 2, 3, 4 rate cuts before demand really recovers? Thanks so much..

This is Glenn. I’ll take the question. If we look at our CTS business in the second half of the year, we’re modeling to be down low single digits, which would be an improvement from what we saw in the first half of the year. We clearly recognize it’s a challenging environment.

Having said that, there is a lot of reasons to believe that we will see better performance in the second half of the year versus first half of the year. So first, I would highlight what we’re seeing in terms of retail demand in the U.S. with our imaging business, we were actually flat in our imaging business on a retail level.

So we were down double digits wholesale, which is what we report revenues out on. But from a retail perspective, it was encouraging to see a pickup in demand on imaging on a retail level, and that should lead to dealer orders coming forward in the second half of the year.

We talked about the Orthophos re-launch of our 2D and 3D imaging machine in Germany, seeing good momentum there, starting to convert those orders now to sales. We are going to be also re-launching that product in the rest of Europe and Asia in the second half of the year. So, that should be a bit of a help.

I mentioned earlier as well, our new product launch, we are very excited about. We will be more specific on what that is in the very near future, but that should drive incremental momentum in sales in the back half of the year.

We have got our DS World event coming up in Las Vegas in September that typically leads to a lot of momentum going into and coming out of that conference. Q4 seasonality should help us. Typically, it’s a stronger quarter. We have got easier comps in the second half of the year versus first half of the year.

Germany actually has shown signs of improvement in our survey, albeit slight improvement, but it’s moving in the right direction for the first time in over a year. And obviously, we call out Germany because of the significance of the equipment business in that market.

And then just lastly, there is some favorable reimbursement trends that we are seeing in places like Japan with Interoil scanning. And so there is a lot of things that are going to help us, I think in the second half of the year.

With all the things that I just mentioned, we are still modeling to be down, but not down as much as we saw in the first half of the year. Simon, I don’t know if you want to comment..

Yes. Just a quick comment, David, on scanners, I think we have spoken before about the importance of scanners for our business and to unlock value in other parts of our portfolio. In Q2, we had another pretty strong scanner quarter.

The mix has shifted, but we had a really strong quarter in standalone Primescan and Primescan Connect and a more challenging quarter in the full-line CEREC scanner.

So, as you roll forward into a more normalized or even an improved macro environment, having scanners in the marketplace is crucial for us to be able to unlock value quickly in the rest of our portfolio, chairside, aligners, implants and so on and so forth.

So, we are pleased with our scanner performance in Q2 and expect that to continue for the rest of the year..

Got it. Thanks so much..

Thank you. [Operator Instructions] Our next question comes from Elizabeth Anderson from Evercore ISI. Please go ahead..

Hey guys. Thanks so much for the question. I had two main questions. One, can you kind of help us parse out the pricing degradation impact either from competition or from trade downs on equipment versus maybe what’s more on the macro side? And then I was in caved to hear your – the comments about the improving business in China.

Obviously, we are sort of comping against some VBP type quarters, but it’s obviously at odds to most of the commentary we are hearing about China these days. So, just a little bit more detail on sort of what’s driving that would be very helpful. Thank you..

Elizabeth thanks for the question. On pricing, we have seen some pricing pressure on the imaging side of our business. I would say that’s pretty much been offset in total with our EDS portfolio. So, when we look at our pricing across our entire business, it’s kind of flat with some pressure on equipment, but it’s being offset with EDS.

So, it’s overall, I would say, having a neutral effect. What we have seen though is more volume coming from lower-priced products. So, Primescan Connect had a really strong quarter. It comes at a lower price point. And so obviously, that results in lower revenues on equal volumes, if you will.

And so that’s been part of the dynamics that we are seeing in terms of the top line and also some of the impact on gross margins because PrimeScan Connect has lower gross margins than our other Primescan offerings. So, on the pricing side, those are the dynamics that I would call out. In terms of China, we had another really strong quarter in China.

Overall, we grew high-single digits. On the implant side, we actually grew over 30%. For the rest of the year, though, we do expect it to moderate.

And so if we look at our implant business, as an example, I would tell you that China is likely going to show slower growth on the implant side because we lap tougher comps, but we do expect to see better performance in the U.S. And we have talked about that previously.

We have got a lot of things that are showing progress there, and that should offset some of the moderation that we are seeing in China in the back half of the year..

And Elizabeth, we did have a strong quarter in China in EDS, but it is no different from any other region with respect to CTS..

Got it. Thank you..

Thank you. [Operator Instructions] Our next question comes from Michael Cherny from Leerink. Please go ahead..

Great. Thank you. This is Dan Clark on for Mike. Just a question going back to the Patterson non-renewal. Could you just help us size the revenue or the growth that sort of comes from your business has flown through Patterson? And like how should we kind of think about that going forward, whether there is a renewal or not in 2025? Thank you..

Yes. So, I think first and foremost, I will give you the publicly available information from our latest 10-K, which is 2023 data. So, both Patterson and China account for about 21% of our annual revenues. So, you can think of that as north of $800 million. Shine is about 14% of that and Patterson is about 7%.

So, it gives you a rough magnitude of the two distributors. So, that means Patterson is in that $275 million type range. As a reminder, Patterson is predominantly the U.S. and Canada. They do very little business outside of North America. They are heavily equipment for us.

So, if you look at the split of their sales, it’s about 70% equipment, 30% consumables. China is more 50-50 on equipment consumables and China is much more balanced geographically with half the revenues in the U.S., half outside the U.S. So, those are the overall numbers for our two big distributors.

Obviously, we work with other distributor partners as well. And if you look at our total business, we do about two-thirds of our total sales through distribution globally. So, hopefully, that gives you some framing out of the size of our distribution business..

Great. Thank you..

Thank you. [Operator Instructions] Our next question comes from Jon Block from Stifel. Please go ahead..

Great guys. Thanks and good morning. I guess I am going to go down to a similar road and maybe just ask a big first question and a tighter second one.

That non-renewal to Patterson, how do we think about it? Is that sort of a function of Shine’s global reach in terms of why they are, call it, better insulated, or is it just the timing of contracts how do we think about other domestic distributors that I guess you are working with? And Simon, I am sure some of this is sensitive, but any color would be helpful.

And then just to tack on to that, Glenn, your comment to the prior question of two-thirds of your sales, I think you said is through distribution globally. Simon, with some of those investments that you talked about just how do we think about that two-thirds percentage trending longer term with the ongoing investments in your own sales force.

And I promise the second will be tighter. Thank you..

Okay. Good morning Jon. Listen, the non-renewal is exclusive to Patterson in the U.S. and Canada. We have 12 months left to run on that. We hope we get to a new agreement that is more reflective of, as I have said in the prepared remarks, the current environment and the value that we bring to Patterson specifically.

Now, in relation to your comment on the investments we are making. As you know, all distributors distribute products for many different companies.

And we feel it’s incumbent upon us to create our own demand and to have our sales forces in front of customers, end customers as frequently as possible so that the end customer then requests either of our own channel in endodontics and ortho, for example, or whatever distribution partner they work with, that they would like to buy X, Y, Z from DENTSPLY SIRONA.

We have historically I think abdicated responsibility for creating our own demand to our distributors. And I don’t feel that is appropriate. We should be doing it ourselves and allow the customers to make an educated decision on the products that they choose facilitated by the people who are experts on those products, i.e., DENTSPLY SIRONA reps..

Okay. And I guess just no comment on where you see those two-thirds of sales currently through distributors going longer term. I guess that would be my follow-up to that one. So, to shift gears just and hit on a different topic, by you guys called out legislation and sort of the greater than 20% growth, I think on the new number was closer to 15%.

I think it’s sort of been drip-drip with some states. So, I would just be curious your thoughts on, where does this go longer term, right? When we think out over the next couple of years, or do you feel like the states that have moved, have moved and you have largely ring-fenced this as we think about things going forward? Thanks..

Yes. Thanks Jon. So, that legislation varies state-to-state. But there are some common themes between them all. We have done a number of things to mitigate that. Number one, we have invested in government relations or more investment in government relations to help states understand the process of direct-to-consumer aligners.

And then secondarily, we have adjusted our internal processes to facilitate these changes that some states are mandating. And then I would say, thirdly, the Byte Plus model, which continues to gain some momentum and traction is also going to help us here.

I think the adjustment that you have seen in the growth rates is because of the incremental steps and arguably costs to patients, because they have to take some time out of work to go to the dentist, or do a tele dentistry revisit. So, it’s not a reflection on the product that we provide.

It’s a reflection of rather on the internal steps that these regulations are enforcing or placing on potential customers. And it continues to evolve..

Thank you..

Thank you. [Operator Instructions] Our next question comes from Jeff Johnson from Baird. Please go ahead..

Thank you. Good morning guys. Simon, I guess I want to stick on the bigger picture theme here on the dealer relationships and what have you. Everything you commented on here in the Q&A, it sounds like it’s focused on Patterson.

I want to go back to the transcript, but it sounded like to me, you also made a comment that some of these relationships you are looking at are with dealers who do compete with you in certain product categories. That sounds to me like it’s a comment that would bring Shine into discussion as well.

But in one of your answers, you obviously talked about kind of the relationship is still looking good with Shine. So, just one, what kind of footing are you on with China at this point? Is there any commentary you meant to be targeted even at them in the prepared remarks? And then I have one follow-up. Thank you..

No commentary about any other distributor, Jeff, apart from the relationship with Patterson.

But as I noted in response to Jon’s question, we have a responsibility to create our own demand and funnel it through the appropriate channel, whether it’s the direct channels that we have in endo and ortho, for example, or through distribution partners worldwide. I think we have a positive relationship with Schein and indeed with Patterson.

We just have to take steps with Patterson to discuss renewed or alternative terms and conditions..

Yes. Understood. And I guess my other question would be, you do talk about the inside sales force, increasing the efforts there, increasing some of the e-commerce investments, things like that. So, I will go back and give Jon maybe a third crack at his question on the percentage that goes through dealers.

I guess my question here is, if you were in there with inside or if you are generating traction with inside sales force, and getting orders for general consumables product, would you put that order through the dealer? I guess I could understand you saying, no, but that changes those dynamics and maybe strains of those relationships as well.

So, just trying to understand as you go down this path bigger inside sales, would those orders generated through the inside sales and get transmitted to the dealers, or would you have other plans for that? Thank you..

Yes. I think, Jeff, I was – or at least I hope I was very clear in the prepared remarks and questions thus far. We want to create our own demand, and we absolutely will funnel it through the appropriate channel. In some cases, that’s our channel. And in other cases, such as the consumables you mentioned, that is Shine in the U.S.

or indeed some others in the U.S. So, we absolutely will go to those distributors..

Understood. Thank you..

Thank you. [Operator Instructions] Our next question comes from Jason Bednar from Piper Sandler. Please go ahead..

Thanks. Good morning. Thanks for the questions here. A lot of detail today, I think a lot of folks have already covered a lot of the questions around the dealers here. I want to come back to the restructuring program, the Phase 2. Maybe just more to get some help on some of the modeling, the pacing around the $80 million to $100 million in savings.

I guess how would you have us layer these into the model, Glenn? Is it linear, more weighted towards ‘25, we guys wait till ‘26 to see the full annualized effect? And it looks like that’s a growth savings figure, but you are clearly talking about some of the reinvestment plans and those things Jeff was just mentioning on the inside reps.

How should we would be thinking, I guess about the net savings level? And I guess similar question, just are these linear net savings? Thanks..

Yes. I think the only thing we are going to comment on relative to the restructuring program is the savings are expected to be $80 million to $100 million over 12 months to 18 months. Clearly, a lot of that will take place in 2025, but it is a 12-month to 18-month window.

We indicated it’s about 2% to 4% of the workforce that’s going to be affected as a result. I would expect it’s probably somewhere around $40 million to $50 million of charges associated with this restructuring program as well. In terms of the net savings, obviously, we are going to drop some to the bottom line to drive us towards the $3 EPS target.

And then obviously, the reinvestments that Simon talked about should drive better top line performance and help to shore up some of our top line growth that we have got planned over the next several years. So, that’s I think what we are going to comment on at this time..

Alright. Helpful. Simon, one for you, I think you mentioned in some of your remarks a shift into targeting the orthodontic channel with your clear aligner offering. I think I heard that right.

I guess I always figured you had plenty of runway in the GP channel across the globe, but you are saying the orthodontist community is an opportunity for SureSmile. There is some intrigue there. It’s completely untapped for you, sure. But it’s also dominated by a key competitor.

I guess I am curious how you would respond on the opportunity you see in front of you with the GP channel? Is this some kind of indicator there? And then what’s the approach you are looking to take commercially with the orthodontist since you no longer have relationships there after selling the bracket and wire business a few years ago..

Yes. Thank you, Jason. Listen, we absolutely do still have some runway left in the GP channel. We are not suggesting, we move away from that. In fact, in Q2, we had sequential improvement in the number of new customers that we brought online. We had sequential improvement in the number of aligners sold per customer in Q2. But let’s face facts.

The majority of the volume is in the orthodontic specialty space. We feel we have a compelling technology offering for the orthodontists with SureSmile. We have spoken about that before. We also feel and this is based on customer feedback that our software solution is an excellent solution.

We do some work to do on it around the user friendliness of it, and that’s reflected in some of the comments I make. But the other thing here, too, is orthodontists use three or four aligner brands in their offices. And today, we are not one of those aligner brands.

So, we would like to get on their formulary as were and give them a choice to choose a DENTSPLY SIRONA clear aligner has got great clinical outcomes, is easy to use and has got great software, albeit somewhat difficult to use. And so we are going to endeavor to address that usability..

Okay.

Anything on the commercial structure?.

I think it’s consistent with where we have invested in other areas. We will invest in feet on the street in the orthodontic business moving forward or more feet on the street in the orthodontic business targeted at orthodontists..

Okay. Very helpful. Thank you..

Thank you. Our last question comes from Allen Lutz from BoA. Please go ahead..

Good morning and thanks for taking the questions. Glenn, a couple for you. Are there any restructuring cost savings embedded in the updated 2024 guide? And then can you provide a little bit about where the headcount reductions will be focused? Thanks..

I assume you are talking about the next phase of our transformation is your question?.

Yes..

There is a small amount that’s factored in associated with the 24 guide. I won’t give a specific amount, but think of it as a couple of cents of EPS benefit.

In terms of the headcount, I think generically speaking, we are just going to say that we see some marketing efficiencies across the organization and more reductions that could be done around some of the corporate functions..

Great. And then for a follow-up, I think someone already asked on macro, but following up a little bit on the customer survey from July, things getting a little bit weaker here. I guess if interest rates do come down, just trying to get a sense of your expectations.

How long would it take if interest rates do come down for maybe some of that to impact your business? Thanks..

Yes. I mean it’s hard to say. I think certainly, it would be a couple of moves on the rate side. So, it’s not one or two, it’s probably three or four before we start to see some meaningful improvement. But I think consumer confidence, consumer sentiment, would help a lot.

I think seeing better patient traffic with our customers will help a lot because they make a lot of money on consumables, and that would obviously be money they could use towards upgrading their technology and their offices and their practices. So, those are other factors that we are looking at here as well.

And I think with some of the innovation we have coming out that can move some of our customers as well. And again, the innovation I am referencing is going to be out in the very near-term..

Great. Thank you very much..

Thank you. I am showing no further questions at this time. I will now turn it over to Simon Campion for closing remarks. Please go ahead..

Thank you everyone for joining us today. In closing, I would like to reiterate my thanks to the entire DENTSPLY SIRONA team for their valuable contributions to our organization and their unwavering commitment to our customers.

We are making progress, advancing our ongoing transformation and creating an organization, and a culture that will benefit all shareholders over the long-term from customers to employees to investors. Thank you for your time today..

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect..