DENTSPLY SIRONA Inc.

Good day, and thank you for standing by. Welcome to the Dentsupply, Serona earnings conference call. At this time, all participants are in listen only mode. After the speakers presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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 Daly. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Dentsupply, Serona second quarter 2024 earnings call. Joining me for today's call is Simon Cambion, 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 investor section of our website at .dentsupplyserona.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 risk and uncertainty. Our most recently filed form 10K and any updating 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's financial performance, enable 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 investor 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 three, 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 well-specced healthcare. We were pleased to see double-digit growth in aligners despite some headwinds which we will discuss later. Our continued focus and investment in well-specced healthcare enabled us to deliver another quarter of strong growth. For the full year, we are revising our outlook based on first-time performance, FX, evolving market dynamics, and the continued macroeconomic headwinds. 18 months ago, we announced a restructuring plan to transform dense plicerona. We also communicated that this would be a journey. With our phase one initiatives complete or well underway, we are ready to advance to phase two 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 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 one and phase two restructuring plans are fundamentally shaping our company. We designed these plans to improve operational performance and drive much higher customer engagement, increase alignment, drive process and discipline, and strategically position Densply Serona to win. Since announcing phase one, we have moved very deliberately in many areas, including reinvestment in key geographies commercially, competency struts 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 one 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 believed there were additional opportunities to shape and structure our company, we prioritized the phase one operational initiatives. We expect these new initiatives will not only improve our financial performance but also refine our organizational structure and 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 timeline 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 US, 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 Dense by Serona inside sales reps in the US. 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 under-penetrated. Our studies demonstrate a compelling value and technology proposition, leading us to increase investment 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 non-renewal 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 two 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 can drive the necessary changes to address our operational realities, improve organizational health and better position Densplice or Ona for future growth. Furthermore, we announced today that as part of our leadership changes in connection with phase two, 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 two 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 professional's 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 US. Despite the challenges already noted, the contribution of our phase one activities to our $3 target is meaningful and within our control. This EPS target remains a north star for us and we expect phase two 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 Invest Today. 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 four. Our second quarter revenue was $984 million, representing a decline of .2% versus the prior year quarter. On an organic basis, sales declined .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 US 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 well-specced healthcare. These improvements were offset by declines in CTS, where we continue to experience the effects of challenging equipment market conditions and competitive pressure. Even the 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 large 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 49 cents, 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 30th. Our Q2 leverage ratio remains stable at 2.7 times, 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 in slide five. 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 US. Our new endo motor, X-Smart Pro Plus, drove increased demand in Europe and Japan in Q2, and recently received 510K clearance to launch in the US, 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%. Jurismile, our professional aligner brand, grew 6%, driven by double-digit growth in Europe. Jurismile also saw accelerated sales growth in Japan. We've recently made investments to expand our footprint and coverage. Byte, our -to-consumer aligner brand, grew 16% over the prior year quarter. During the quarter, legislative changes required us to adjust our -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 implants growth in China, partially offset by declines in the US and Europe. Our value implant segment was flat in the quarter, as growth in most markets was offset by the impact of Turkey's 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 increase 4% sequentially, but declined 16% versus the prior year quarter. We saw double digit declines in both E&I and CAD CAM, as 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 well-specced healthcare, organic sales grew .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-specced growth rate to moderate to the mid single digit range. Now let's turn to slide six to discuss second quarter financial performance by region. US organic sales declined .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. US 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 US 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 .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 declines in CTS were partially offset by growth in EDS and well-specced healthcare, both of which benefited from new product launches. Rest of world organic sales declined .3% in the quarter as robust growth in China for endo and implants was offset by soft demand for equipment in Japan and Australia and New Zealand. With that, let's move to slide seven 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 2000 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 US, 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 dollars. 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, $2.02, representing growth of seven to 10% over the prior year. For the third quarter, we expect sales to increase low single digits on an organic basis and decline low single digits on a reported basis compared to the prior year. Sequentially, we project gross margin to improve slightly in Q3, but decline 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 South Carolina. Thank

you, Simon. Thank you, Glenn. Moving on to our strategic update starting on slide eight. 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 skew optimization work and expect to eliminate almost 50% of our endo and restorative skews by the end of 2025. We anticipate having the majority of this completed by the end of this year, starting with a non-revenue generating skews while we work towards migrating revenue generating skews in 2025. Our supply chain team continues to seek opportunities to improve our network performance. We have recently closed another US distribution site and announced plans to close another US-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 the 1st, we will go live with SAP Forhanna 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 two of our plans to transform Densply Serona. We have demonstrated our ability to deliver on such objectives with our success to date in phase one, and we are confident we can deliver on these new initiatives and investments as we strive towards making Densply Serona the preeminent partner for dentists, hygienists, and practice owners around the world. Now let me close with a few remarks on slide nine. 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 one, will continue to drive efficiency and position as 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 US 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 US. Our new product launches, particularly in endodontics and WellSpect, have done well for us, and we look forward to sharing more information with you as 2024 progresses. And with that, I will open it up for questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.

Please limit your inquiries to one question and one follow-up. Please stand by while we compile the Q&A roster. The first question comes from Brandon Vasquez from

William Blair. Please go ahead.

Morning, everyone. Thanks for taking the question. Maybe first I'll focus a little bit on macro. I mean, it's something that's on everyone's mind 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?

Yeah, Brandon, this is Glenn. I'll start. Good morning. I think first and foremost, when I see 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 US market. So, you know, 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 consumable 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 US 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?

Yeah, 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 reaffirmed 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 two 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 is coming a little bit lower at this point? Thanks, S.

Yeah, thank you, Brandon. As we noted at Invest Today 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 reduced interest rates continue to swirl, but it's going to take more than one of those. What you heard us describe today was a balance between aiding our path 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 Invest Today. 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. One moment for our next question.

Our next question comes from Kevin Caliendo from

UBS. Please go ahead.

Thank you very much. This is Dylan Finlayon for Kevin. Just honing in on some of those comments about your non-renewal of the EPS. We're meeting with Patterson for equipment. I guess from here, does it make sense to work with another distributor or is this a pivot in the model entirely in your -to-market strategy there? And then secondarily, any context on the timing of when this current contract expires? Thanks.

Good morning, Dylan and Simon. The 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 with Patterson for some time about our relationship, and we felt that this was an appropriate time to begin negotiations about renewing contracts, et cetera, et cetera, and given the value that we bring to them, given the new products that we introduce, et cetera, et cetera. 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. 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 how 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 US and Canada.

All right, thank you. Next question, please. One moment for our next question.

Our next question comes from David Saxon from Needham

and Company. Please go ahead.

Oh, great. Good morning, Simon and Glenn. Thanks for taking my questions.

Maybe

I'll start with Glenn 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?

You know, 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 gonna be in Q4 and a lot of that is gonna 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 Q2 on 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 margins 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 first time in just on CTS. So it sounds like ENI 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 four 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 two, three, four rate cuts before demand 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's 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 US 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 Orthophoze relaunch of our 2D and 3D imaging machine in Germany. Seeing a good momentum there, starting to convert those orders now to sales. We're gonna be also relaunching 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're very excited about. We'll 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've 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've 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's some favorable reimbursement trends that we're seeing in places like Japan with inter-oil scanning. And so there's a lot of things that are gonna help us, I think in the second half of the year with all the things that I just mentioned, we're 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 wanna comment first.

Yeah, just a quick comment, David, on scanners. I think we've 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 had shifted, but we had a really strong quarter in standalone prime scans and prime scan connect and the more challenging quarter in the full line CREC 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, chair side, 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. Great, thanks so

much.

Thank you.

One moment for our next question. 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 intrigued to hear the comments about the improving business in China. Obviously we're sort of comping against some VBP type quarters, but it's obviously at odds to most of the commentary we're 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.

Yeah, Elizabeth, thanks for the question. On pricing, we have seen some pricing pressure on the imaging side of our business. I'd 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 price products. So Prime Scan 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're seeing in terms of the top line and also some of the impact on gross margins because Prime Scan Connect has lower gross margins than our other Prime Scan 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 implants business as an example, I would tell you that China is likely gonna show slower growth on the implant side because we lap tougher comps, but we do expect to see better performance in the US. And we've talked about that previously. We've got a lot of things that are showing progress there and that should offset some of the moderation that we're 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. One moment for the next question. Our next question comes from Michael

Cherney from Learing, 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 how should we think about that going forward whether there is a renewal or not in 2025? Thank you.

Yeah, so I think first and foremost, I'll give you the publicly available information from our latest 10K, which was a 2023 data. So both Patterson and Shine 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 seven. So it gives you a rough magnitude of the two distributors. So that means Patterson's in that $275 million type range. As a reminder, Patterson is predominantly the US and Canada. They do very little business outside of North America. They're heavily equipment for us. So if you look at the split of their sales, it's about 70% equipment, 30% consumables. Shine is more 50-50 on equipment consumables and Shine is much more balanced geographically with half the revenues in the US, half outside the US. 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. One moment for our next question.

Our next question comes from John Block from Stiffel. Please go ahead.

Great guys, thanks and good morning. I guess I'm gonna go down 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're called better insulated or is it just the timing of contracts? How do we think about other domestic distributors that I guess you're working with? And Simon, I'm sure some of this is sensitive but any color would be helpful. And then just to tack onto 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, John. Listen, the non-renewal is exclusive to Patterson in the US 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 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 Dense Placerona. We have historically, I think, abdicated responsibility for creating our own demands 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. Dense Placerona 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'd be my follow up to that one. To shift gears and head 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, drip with some states. So I'd 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've largely ring fenced this as we think about things going forward? Thanks for your time.

Yeah, thanks John. 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 consumer aligners. And then second, 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've 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 teledentistry visit. So it's not a reflection on the product that we provide. It's a reflection of or rather on the internal steps that these regulations are enforcing or placing on potential customers. And it continues to evolve. Thank

you.

Thank you. One moment for our next question. Our next question comes from Jeff Johnson from Bayard. Please go

ahead.

Thank you, good morning guys. Simon, I guess I wanna stick on the bigger picture theme here on the dealer relationships and what have you. Everything you commented on here in the Q&A sounds like it's focused on Patterson. I wanna go back to the transcript, but it sounded like to me you also made a comment that some of these relationships you're 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 shine 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 John'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 shine and indeed with Patterson. We just have to take steps with Patterson to discuss renewed or alternative terms and conditions.

Yeah, 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'll go back and give John 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're generating traction with inside sales force and getting orders for a 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 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 then get transmitted to the dealers or would you have other plans for that? Thank you.

Yeah, I think Jeff, or at least I hope I was very clear in the prepared remarks and questions thus far that 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 US or indeed some others in the US. So we absolutely will go to those distributors.

Understood, thank

you.

Thank you.

One moment for our next question. Our next question comes from Jason Benar

from

Piper Sandler,

please go ahead.

Hey, 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 two, maybe just more to get some help on some of the modeling and the pacing around the 80 to 100 billion in savings. I guess, how would you have us layer these into the model, Glenn, is it linear or more weighted towards 25 to be, which I'd wait till 26 to see the full annualized effect? And it looks like that's a gross savings figure, but you're clearly talking about some of the reinvestment plans and those things Jeff was just mentioning on the inside reps. How should we be thinking, I guess, about the net savings level? And I guess, similar question, are these linear net savings? Thanks.

Yeah, I think the only thing we're gonna comment on relative to the restructuring program is the savings are expected to be 80 to 100 million dollars over 12 to 18 months. Clearly, a lot of that will take place in 2025, but it is a 12 to 18 month window. We indicated it's about two to 4% of the workforce that's gonna be affected as a result. I would expect there's probably somewhere around 40 to 50 million dollars of charges associated with this restructuring program as well. In terms of the net savings, obviously we're gonna 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've got planned over the next several years. So that's, I think, what we're gonna comment on at this time.

All right, well, 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're saying the orthodontist community is an opportunity for sure, Smile. There's some intrigue there. It's completely untapped for you, sure, but it's also dominated by a key competitor. I guess I'm curious how you'd 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're looking to take commercially with the orthodontist since you no longer have relationships there after selling the Bracken and Wire business a few years ago?

Yeah, thank you. 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 orthodontist with SureSmile. And we've 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 it were, and give them a choice to choose a dense-price Orona clear aligner that's 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.

Anything on the commercial structure?

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

OK, very helpful. Thank you.

Thank you. Our last question comes from Alan Lutz from BOA. Please go ahead.

Good morning, and thanks for taking the question. 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're talking about the next phase of our transformation in your question. That's correct, yes. There's 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're just going to say that we see some marketing efficiencies across the organization and more reductions that can be done around some of the corporate functions.

Great. And then for 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. Yeah, 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 in their offices and their practices. So those are other factors that we're looking at here as well. I think with some of the innovation we have coming out, that could move some of our customers as well. And again, the innovation I'm 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 Dance by Serona team for their valuable contributions to our organization and their own wavering 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.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Good day, and thank you for standing by. Welcome to the Dance by Serona earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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 Daly. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Dance by Serona second quarter 2024 earnings call. Joining me for today's call is Simon Cambion, 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 investor section of our website at .dancebyserona.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 risk and uncertainties. Our most recently filed Form 10-K and any updating 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, enable 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 in 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 three, 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 well-specced 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 well-specced healthcare enabled us to deliver another quarter of strong growth. For the full year, we are revising our outlook based on first-time performance, FX, evolving market dynamics, and the continued macroeconomic headwinds. Eighteen months ago, we announced a restructuring plan to transform dense plicerona. We also communicated that this would be a journey. With our Phase I initiatives complete or well underway, we are ready to advance to Phase II 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 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 I and Phase II restructuring plans are fundamentally shaping our company. We designed these plans to improve operational performance and drive much higher customer engagement, increase alignment, drive process and discipline, and strategically position Densply Serona to win. Since announcing Phase I, we have moved very deliberately in many areas, including reinvestment in key geographies commercially, competency struts 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 I 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 targets. While we always believed there were additional opportunities to shape and structure our company, we prioritized the Phase I 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 our 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 re-evaluating our marketing efforts across our business. We have assessed and re-evaluated 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 timeline 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 US, 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 Dense by Serona inside sales reps in the US. 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 under-penetrated. Our studies demonstrate a compelling value and technology proposition, leading us to increase investment 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 non-renewal 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 can drive the necessary changes to address our operational realities, improve organizational health, and better position Densplice or Ona for future growth. Furthermore, we announced today that as part of our leadership changes in connection with Phase 2, 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 professional's 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 have 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 activities 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 Invest Today. 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 .2% versus the prior year quarter. On an organic basis, sales declined .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 well-specced healthcare. These improvements were offset by declines in CTS, where we continued to experience the effects of challenging equipment market conditions and competitive pressure. Even in margins contracted 30 basis points, many 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 large 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 49 cents, 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 remains stable at 2.7 times, 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 in 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, ExSmart Pro Plus, drove increased demand in Europe and Japan in Q2 and recently received 510K 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%. Jurismile, our professional aligner brand, grew 6%, driven by double-digit growth in Europe. Jurismile also saw accelerated sales growth in Japan, where we recently made investments to expand our footprint and coverage. Byte, our -to-consumer aligner brand, grew 16% over the prior year quarter. During the quarter, legislative changes required us to adjust our -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 implants 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's 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 increase 4% sequentially, but decline 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 also 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 well-specced 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-specced growth rate to moderate to the -single-digit range. Now let's turn to slide 6 to discuss second quarter financial performance by region. US organic sales declined .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. US 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 US 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 .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 declines 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 .3% in the quarter, as robust growth in China for endo and implants was offset by soft demand for equipment in Japan and 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 US, France, and Spain. While customers expressed an interest in innovations that can improve their workflows, they also reported that they planned 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 decline low single digits on a reported basis compared to the prior year. Sequentially, we project gross margin to improve slightly in Q3 but decline 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 a 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 US distribution site and announced plans to close another US-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 1st, we will go live with SAP Forhanna 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 two of our plans to transform Densply Serona. We have demonstrated our ability to deliver on such objectives with our success to date in phase one, and we are confident we can deliver on these new initiatives and investments as we strive towards making Densply Serona the preeminent partner for dentists, hygienists, and practice owners around the world. Now let me close with a few remarks on slide nine. 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 one, will continue to drive efficiency and position as 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 as 2024 progresses. And with that, I will open it up for questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.

Please limit your inquiries to one question and one follow-up. Please stand by while we compile the Q&A roster. The first question comes from Brandon Vasquez from

William Blair. Please go ahead.

Good morning, everyone. Thanks for taking the question. Maybe first I'll focus a little bit on macro. I mean, it's something that's on everyone's mind 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?

Yeah, Brandon, this is Glenn. I'll start. Good morning. I think first and foremost, we're 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 consumable 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?

Yeah, good morning, Brandon. 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 reaffirmed 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. So 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 two 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 is coming a little bit lower at this point? Thanks, S.

Yeah, 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 reduced interest rates continue to swirl, but it's going to take more than one of those. What you heard us describe today was a balance between aiding our path 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 are 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. One moment for our next question.

Our next question comes from Kevin Caliendo from UBS.

Please go ahead.

Thank you very much. This is Dylan Finlayon for Kevin. Thanks, Brandon. 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 the model entirely in your -to-market strategy there? And then secondarily, any context on the timing of when this current contract expires? Thanks.

Good morning, Dylan and Simon. The 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 with Patterson for some time about our relationship and we felt that this was an appropriate time to begin negotiations about renewing contracts, etc., etc. And given the value that we bring to them, given the new products that we introduce, etc., etc. 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. 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 how 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 US and Canada.

All right, thank you. Next question, please. One moment for our next question.

Our next question comes from David Saxon from

Needham and Company. Please go ahead.

Oh, great. Good morning Simon and Glenn. Thanks for taking my questions.

Maybe

I'll start with Glenn 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? You

know, 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 Q2 on 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 margins 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 first time in just on CTS. So it sounds like ENI 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 four-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 two, three, four rate cuts before demand 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's 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 Orthophoze relaunch of our 2D and 3D imaging machine in Germany. Seeing a good momentum there, starting to convert those orders now to sales. We're going to be also relaunching 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're very excited about. We'll 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've 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've 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. Obviously, we call out Germany because of the significance of the equipment business in that market. And then just lastly, there's some favorable reimbursement trends that we're seeing in places like Japan with inter-oral scanning. There's a lot of things that are going to help us, I think, in the second half of the year. So with all the things that I just mentioned, we're 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. Just

a quick comment, David, on scanners. I think we've 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 had shifted, but we had a really strong quarter in standalone, PrimeScan and PrimeScan Connect, and a more challenging quarter in the full-line CREC 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, so chair side, 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. Great. Thanks so

much. Thank you. One moment for our next question. 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 intrigued to hear the comments about the improving business in China. Obviously, we're sort of comping against some VBP type quarters, but it's obviously at odds to most of the commentary we're 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.

Thanks for the question. On pricing, we have seen some pricing pressure on the imaging side of our business. I'd 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're 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 percent. For the rest of the year, though, we do expect it to moderate. And so if we look at our implants 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've talked about that previously. We've got a lot of things that are showing progress there, and that should offset some of the moderation that we're seeing in China in the back half of the year.

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. One moment for the next question. Our next question comes from Michael Cherney

from Learing. 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 how should we kind of think about that going forward, whether there is a renewal or not in 2025? Thank you.

Yeah. So I think first and foremost, I'll give you the publicly available information from our latest 10K, which was 2023 data. So both Patterson and China account for about 21 percent of our annual revenues. So you can think of that as north of 800 million dollars. China is about 14 percent of that and Patterson is about seven. So it gives you a rough magnitude of the two distributors. So that means Patterson's in that 275 million dollar type range. As a reminder, Patterson is predominantly the U.S. and Canada. They do very little business outside of North America. They're heavily equipment for us. So if you look at the split of their sales, it's about 70 percent equipment, 30 percent 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. One moment for our next question.

Our next question comes from John Block from Stiffel. Please go ahead.

Great, guys. Thanks and good morning. I guess I'm going to go down 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're called better insulated? Or is it just the timing of contracts? How do we think about other domestic distributors that I guess you're working with? And Simon, I'm 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.

OK, good morning, John. Listen, the non-renewal is exclusive to Patterson in the US 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 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 XYZ from Dense Placerona. 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. Dense Placerona reps.

OK, 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. To shift gears and hit on a different topic, you know, 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, drip with some states. So I'd 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've largely ring-fenced this as we think about things going forward? Thanks for your time.

Yeah, thanks. Thanks, John. 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 consumer aligners. And then second, 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've 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 teledentistry visit. So it's not a reflection on the product that we provide. It's a reflection of or rather on the internal steps that these regulations are enforcing or placing on potential customers. And it continues to evolve. Thank you.

Thank you. One moment for our next question. Our next question comes from Jeff Johnson from Bayard. 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've commented on here in the Q&A 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're 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 still looking good with Shine. So just one, what kind of footing are you on with Shine 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 John'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 Shine and indeed with Patterson. We just have to take steps with Patterson to discuss renewed or alternative terms and conditions.

Yeah, 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'll go back and give John 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 insight or if you're generating traction with inside sales force and getting orders for a 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 those relationships as well. So just trying to understand as you go down this path of bigger inside sales, would those orders generated through the inside sales then get transmitted to the dealers or would you have other plans for that? Thank you.

Yeah, I think, Jeff, or at least I hope I was very clear in the prepared remarks and questions thus far that 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 US or indeed some others in the US. So we absolutely will go to those distributors.

Understood. Thank

you.

Thank you.

One moment for our next question. Our next question comes from Jason Benar from Piper Sandler.

Please go ahead.

Hey, 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 two, maybe just more to get some help on some of the modeling and the pacing around the 80 to 100 billion savings. I guess how would you have us layer these into the model, Glenn? Is it linear or more weighted towards 25, which I would wait until 26 to see the full annualized effect? And it looks like that's a gross savings figure, but you're clearly talking about some of the reinvestment plans and those things Jeff was just mentioning on the inside reps. How should we be thinking, I guess, about the net savings level? And I guess some of our questions are these linear net savings? Thanks.

Yeah, I think the only thing we're going to comment on relative to the restructuring program is the savings are expected to be 80 to 100 million dollars over 12 to 18 months. Clearly, a lot of that will take place in 2025, but it is a 12 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 there's probably somewhere around 40 to 50 million dollars of charges associated with this restructuring program as well. In terms of net savings, obviously we're 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've got planned over the next several years. So that's I think what we're going to comment on at this time.

All right. Helpful. Simon, one for you. I think you mentioned in some of your remarks a shift into targeting the workadonic 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're saying the orthodontist community is an opportunity for sure. Smile. There's some intrigue there. It's completely untapped for you, sure. But it's also dominated by a key competitor. I guess I'm curious how you'd respond on the opportunity to see in front of you with the GP channel. Is this some kind of indicator there? And then what's the approach you're 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?

Yeah, thank you. 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 orthodontist with SureSmile. We've 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 we were, and give them a choice to choose a dense-priced rona clear aligner that's 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.

Anything on the commercial structure?

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

Okay, very helpful. Thank you.

Thank you. Our last question comes from Alan Lutz from BOA. Please go ahead.

Good morning. Thanks for taking the question. Glen, 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're talking about the next phase of our transformation? That's correct, yes. There's a small amount that's factored in associated with the 2024 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're just going to say that we see some marketing efficiencies across the organization and more reductions that can be done around some of the corporate functions.

Great. And then for 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.

Yeah, 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. I think 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're looking at here as well. I think with some of the innovation we have coming out, that could move some of our customers as well. And again, the innovation I'm referencing is going to be out in the very near term. Great. Thank you very much.

Thank you. 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 Dance by Serona 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.