DENTSPLY SIRONA Inc.

Good day, and thank you for standing by. Welcome to the Quarter 3, 2024 Dentsply Sirona Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during your session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrea Daly, Vice President of Investor Relations.

Thank you, Operator, and good morning, everyone. Welcome to the Dents by Sirona Third Quarter 2024 Earnings Call. Joining me for today's call is Simon Campion, Chief Executive Officer, Glenn Coleman, Chief Financial Officer, and Rich Rosenzweig, EVP, Corporate Development, and General Counsel. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.densplyserona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updating information in subsequent SEC filings list 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 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 investor section of the company's website following the call. And with that, I will now turn the call over to Simon.

Thank you, Andrea, and thank you all for joining us this morning for our Q3 2024 earnings call. I will start with an update on Byte, then provide an overview of our Q3 performance and highlights. Then we'll go over Q3 financial results, And I will finish by covering our revised 2024 outlook and a strategic operating update. But first, I want to take a moment to acknowledge Glenn and thank him for his leadership and many contributions to our company and its transformation journey over the past two years. We wish him well in his future endeavors. Let's start with some key points on slide three. In late October, we announced a voluntary suspension of sales, marketing, and shipments of Byte aligners and impression kits while the company conducts its review of certain regulatory requirements related to these products. We made this decision in communication with the FDA and remain in close contact with them. Patients are and will continue to be our top priority. We are committed to doing what's right for them. Byte has communicated to customers that it is not selling impression kits, starting new cases, or processing refinements for patients amid treatment. We are not at a point in our analysis to make a definitive decision concerning BITE, and we are thoroughly evaluating strategic options, which may include a discontinuation of some or all of this business. Our decision will be data-driven, taking into account the legislative environment, recent performance, longer-term prospects, and the ongoing regulatory review, which may take time and require additional investment. We are continuing to assess the resources at Byte for opportunities to leverage capabilities and are already redeploying assets to other parts of our business. In the meantime, we have moved swiftly to significantly reduce discretionary spending. We promised on day one to be transparent with you, and we will continue this philosophy as we determine the next steps for Byte. Turning to third quarter performance, we delivered $951 million in revenue, with organic sales up 1.3%, driven by timing of EDS sales, with distributors purchasing in anticipation of our first US ERP deployment. Excluding this, sales were down 0.8%. We continued to see pressure on our implants and equipment business, and CAD-CAM growth was propelled in part by the launch of PrimeScan2 in September. Reduced conversion rates for Byte drove a sequential double-digit decline, while SureSmile experienced mid-single-digit growth in the quarter over the prior year period. Now let's shift to guidance. As a result of market pressures that continue to impact U.S. equipment, as well as Byte, we are revising our full-year 2024 outlook, which I will cover later. As we told you with the Byte announcement, Byte had approximately $40 million in sales in Q3 and was diluted to adjusted EPS. While we see innovation as a growth catalyst and important value driver for our customers, we remain cautious on the overall macroeconomic environment. Capital equipment and elective procedure headwinds persisted throughout the third quarter, and the environment remains uncertain. Our October customer survey of over 1,300 respondents indicated that our major markets remain largely unchanged. Patient traffic was flat in the U.S. and Germany, while Japan and China both saw declines and results showed a slight decrease in utilization, particularly in elective procedures. Sentiment in Germany remained negative, but it was encouraging to see, at least for now, some improvement in practices' desire to purchase capital equipment. Now, before we discuss Q3 results in more detail, I'd like to share some recent business highlights on slide four. starting with operational updates. On November 1st, we went live with our first ERP deployment in the US, building on our previous rollout in the UK, which I'll cover in a bit more detail shortly. We have now executed the majority of our Phase 2 transformation activities and are on track to deliver full run rate savings by the end of 2025. Moving to innovation, we were pleased to launch PrimeScan 2 in September, which sets a new milestone in digital dentistry. It is hardware independent, wireless, and powered by DS Core. The link between PrimeScan2 and DS Core represents further integration of our digital ecosystem and provides our customers more flexibility and efficiency within their practice while also enabling a better patient experience, which all supports practice growth. With DS Core, we continue to drive adoption with over 32,000 unique users as of the end of Q3, representing approximately 20% growth sequentially. Last quarter, I shared that R&D had identified opportunities to reallocate funds into higher return programs. Specifically, we plan to invest in our SureSmile orthodontic software, accelerate DS Core capabilities, and make further investments across our connected technology platforms. Since the launch of DS Core, we have delivered over 85 new software updates, adding functionality and capability to the platform. We have a healthy innovation pipeline for DS Core and have demonstrated accelerated adoption when we add significant functionality. As we continue to drive innovation, a key component of our strategy is digital connectivity, with DS Core serving as the hub. The transformation to digital dentistry starts with a scan and the versatility and portability of PrimeScan2 with its link to DS-Core provides a gateway to treatment options and planning. Looking forward, we see many more opportunities to advance connected technologies, and we plan to accelerate our pace to get there by allocating more of our R&D dollars to that area. Within CTS, we also expanded the relaunch of the Orthophos SL imaging line, bringing it to additional markets in EMEA and AsiaPac. In EDS, we launched Exmark Pro Plus, our tabletop ender motor in the U.S. Initial reception has exceeded our expectations with our full year projections already achieved by the end of Q3. Sales rep engagement has also been strong with 100% of reps having sold a motor. Through Q3, we successfully received 510K clearances for five products. This is a testament to the improvements we have made in the execution of our NPD and regulatory processes, and we look forward to bringing these innovations to market. Wrapping up our highlights, clinical education remains an important component of how we bring value to our customers. In Q3, we hosted multiple events around the world, including DS World in the US, Spain, and Italy, and our MIS Implant Conference in Europe. At DS World Las Vegas, we hosted over 4,000 total participants and offered more than 100 clinical education courses, and we exceeded our sales projections for this event. Additionally, in Q4, we are holding inaugural DS Worlds in Japan and Brazil. And with that, I'll turn it over to Glenn to provide more details on Q3 financials. Glenn?

Thanks, Simon. Good morning, and thank you all for joining us. I want to start by expressing what a privilege it's been to be part of the Densplacer Rona team. I'm proud of what we've accomplished together and remain confident in the strategy and vision that's driving the company's transformation journey. Before we turn to a discussion on our non-GAAP third quarter financial results, let me mention that we recorded a roughly $500 million non-cash after-tax charge in Q3 related to Goodwill, impacting the orthodontic and implant solution segment. This charge was the result of sustained macroeconomic pressures, legislative challenges impacting BITE, and weakened demand and competitive pressures in implants. Let me now move to slide five to discuss third quarter results. Revenue was $951 million, representing an increase of 0.5% on a reported basis and 1.3% on an organic basis compared to the prior year quarter. Foreign currency headwinds were less than anticipated, but still had a negative $8 million or 80 basis point impact on sales. On a constant currency basis, growth was attributed to EDS, which included an estimated $20 million in U.S. distributor orders placed in advance of the November 1st ERP deployment in the U.S. that were shipped and recognized as revenue in the third quarter. Excluding these timing impacts, overall organic sales declined 0.8%. We also saw growth in CAD-CAM, supported by innovation and the recent launch of PrimeScan2. However, this growth was offset by declines in equipment and instruments and orthodontic and implant solutions as we continue to see market pressures in equipment and elective procedures. EBITDA margins declined 40 basis points versus prior year, mainly due to a gross margin decline from unfavorable product mix shift, lower volume, and lower pricing in CTS. Plus, savings realized through our restructuring programs partially offset some of this decline and contributed to the sequential improvement in EBITDA margins. Adjusted EPS for the quarter was $0.50, up 3% versus the prior year quarter, driven by the timing of distributor orders as previously noted. We also benefited from a lower share count, which was partially offset by higher tax rates. Operating cash flow, $141 million, was up 5% compared to the prior year quarter through the timing of accounts payable and improved inventory management. In the third quarter, we completed $100 million of share repurchases, bringing the year-to-date total cash return to shareholders through share repurchases and dividends to $345 million. We maintained a strong balance sheet with $296 million of cash and cash equivalents as of September 30th, and our leverage ratio increased slightly to 2.8 times. Let's turn to slide six for segment performance. Starting with the essential dental solution segment, which includes endo, resto, and preventive products, organic sales increased 7.5%, primarily driven by the previously mentioned impact from the timing of U.S. distributor orders. This impact was a shift of revenue from Q4 to Q3 and is not expected to impact our full-year revenue guidance for EDS. Rest of world sales also showed an improvement over the prior year quarter with growth in China and Canada. Moving to the orthodontic and implant solution segment, organic sales declined 3.9% with a decline of approximately 1% in aligners. SureSmile, our professional aligner brand, grew 6%. We saw another quarter of strong performance in Europe and the rest of the world. We've made recent commercial investments and expanded our sales force. This is partially offset by soft demand in the U.S. Bite, our direct-to-consumer aligner brand, declined 7% year-over-year and 19% sequentially. primarily due to lower conversion rates and other adverse impacts from legislative challenges in certain states. Moving to implants and prosthetics, sales declined mid-single digits versus the prior year quarter. Sales were down in the U.S. and Europe, and China declined largely due to facing a difficult comp as the prior year period included the first full quarter on the volume-based procurement program. Switching to the connected technology solutions segment, Organic sales increased sequentially, but declined 1.4% versus the prior year quarter. Global CAD-CAM grew mid-single digits due to increased sales of mils and intraoral scanners to our distributors, which includes the benefit from the recent launch of PrimeScan2. Equipment and instruments declined mid-single digits as the demand environment for equipment continues to be soft due to macro headwinds, competitive pressures, and high interest rates. While certain countries started to reduce interest rates in Q3, we did not see any notable impacts in the quarter. Wrapping up segment results, organic sales for WellSPECT Healthcare were flat versus the prior year quarter. We saw continued growth in Europe and rest of the world, while sales in the U.S. were negatively impacted by the timing of orders from a large distributor. On a full year basis, WellSPECT is still expected to grow mid-single digits largely driven by new product launches. Now let's turn to slide seven to discuss third quarter financial performance by region. U.S. organic sales increased 5.1%, primarily due to the timing of distributor orders in EDS. While CTS grew at the wholesale level, retail demand lagged in the quarter. This contributed to a sequential increase in distributor inventory of approximately $48 million which also included the initial stocking of Prime Scan 2 and the expected seasonal increase. This compares to a $28 million sequential increase in the prior year quarter. We continue to closely monitor wholesale and retail dynamics, and we expect distributor inventory levels to return to historical averages by the end of the year. Our U.S. clear aligners business declined 4% versus the prior year quarter, largely driven by declines in our bite business and softer demand trends. In addition, implants declined year over year due to market pressures. Turning to Europe, organic sales declined 2% due to lower demand for implants and continued pressure on equipment, most notably in imaging. This was partially offset by sure-smile growth of over 20% and continued growth in well-specced healthcare. Germany grew in the quarter, the first time we've seen growth in five quarters. We're starting to see slight improvements in sentiment in this market, but remain cautious until we see further signs of improvement. Rest of world organic sales grew 0.6% in the quarter. Implants grew in the region, despite the tough comp for China, and EDS and CAD-CAM were also bright spots benefiting from recent product launches. Growth in these areas was offset by a decline in equipment and instruments. And now I'll turn the call back over to Simon to discuss the full year outlook and strategic operating update.

Thank you, Glenn. First, I'll cover our updated outlook for 2024 on slide eight and then get into our strategic operating update. We are revising our full year 2024 outlook based on the continued market pressures with equipment in the U.S. as well as BITE. Let me note that our forecast revisions do not include potential impacts from any additional remediation measures we may take or decisions we may make related to our continued assessment of strategic options for the BITE business. That said, we wanted to provide you with current updates to our forecast in the spirit of ongoing transparency. We expect organic sales to be down 2.5% to 3.5% compared to our prior estimate of flat to down 1%. We expect full-year net sales to be in the range of 3.79 billion to 3.82 billion, with less of an FX headwind based on current rates. Our outlook for adjusted EBITDA margin is now approximately 17.5%, down from our prior estimate of greater than 18%, driven by lower sales volume and unfavorable mix impacting gross margin, which offset the positive contributions to profitability from our multiple initiatives. With these updates, we now expect 2024 adjusted EPS to be in the range of $1.82 to $1.86, representing slight growth over the prior year at the midpoint of the range. While we don't plan to issue guidance until February, I think the obvious question many of you will have surrounds our original $3 adjusted EPS target for 2026. Clearly, the macro and other pressures, like BITE, have created significant hurdles to achieving this target, and we will provide you an update with our year-end results. Moving on to our strategic update, starting on slide 9. This year, we have faced challenges that have negatively impacted our performance, such as market and other dynamics, and most recently, BITE. Specifically, we have underperformed in certain major geographies and product categories. We told you, for example, at the beginning of the year that we expected growth acceleration in implants in the second half, and we have not delivered the progress we anticipated. As one of the steps to address these issues, we have made a number of leadership changes as we continue to evolve to a high-performance, disciplined, and accountable culture in this company. The initiatives we have underway to transform Dance by Sirona are progressing as planned and we remain confident in the strategy and the priorities we've set to execute on them. Last quarter, we shared our plans to unlock further efficiency through a second phase of transformation. We have now executed on over 70% of the identified actions and remain on track to deliver on our phase two savings goal. Now moving to slide 10 with an update on our foundational initiatives. These initiatives focus on simplifying our portfolio driving network efficiency and modernizing our ERP landscape. We are advancing our SKU optimization work focused on our endo and resto portfolios with approximately 50% of non-revenue generating SKUs already eliminated. We expect the remainder of these SKUs to be eliminated by the end of this year, and we expect to migrate most of the revenue generating SKUs in 2025. Our supply chain team continues to seek opportunities to improve our network performance. This quarter, we ceased operations at one of our US manufacturing sites. To date, we have closed three manufacturing sites and four distribution centers and continue to explore more opportunities to drive more network efficiency. As I mentioned earlier, we have now completed two deployments as part of our ERP rollout of SAP S4 HANA. We went live with the UK in August and resumed business activities at full volumes within three days. As you would expect with these implementations, we have made some limited adjustments and fine-tuning to our processes. Overall, we are very pleased with the UK launch and would like to recognize the collaboration and patience from customers and distributors as we executed this initiative. Earlier this month, we also went live with our first deployment in the U.S. primarily involving the resto and preventive businesses within EDS. This is the first in a series of U.S. deployments with additional rollouts scheduled to continue throughout 2025 and into 2026. As you all know, ERP implementations require tremendous efforts, and I'd like to take this opportunity to thank our global teams for their great work to get us to this point. Earlier, I touched on phase two of our business transformation journey aimed at reducing operating expenses to fund key reinvestments. We previously noted that an important part of this reinvestment focuses on creating our own demand and augmenting both DSs and our distributors' sales efforts. To that end, we have already hired over 75 of the approximately 100 virtual reps we plan to have in place by the end of Q1 2025. trained reps began engaging with customers this very week. And again, we view having a virtual sales team as a cost-effective way to improve our relationships with and proximity to our end customers. Let me give a little more color on some of the redeployment efforts we are undertaking as it relates to the team at Byte. We have recruited a very talented workforce there with the dynamics of this business requiring advanced skill sets for developing a robust patient funnel, strong social media presence, customer service, e-commerce, technology and software, data assessment, and treatment planning. Many of these skills translate very well to our other businesses and initiatives and can potentially accelerate our efforts discussed last quarter, like getting closer to the customer, generating our own demand, and improving our SureSmile software and e-commerce user experience. Now let me close on slide 11 with a few summary remarks. On October 24th, we announced the voluntary suspension of the sales, marketing, and shipment of BITE aligners and impression kits. As we have discussed, we are conducting a regulatory review and evaluating strategic options for BITE moving forward. In the quarter, we posted organic sales growth of 1.3% driven by a mix of timing in EDS and CTS orders. Without the distributor order timing impact, sales declined 0.8%. As anticipated, benefits from our transformation work positively contributed to EBITDA. We are revising our 2024 outlook in light of the market pressures impacting equipment in the U.S. and the evolving landscape with Byte. We remain committed to innovation as evidenced by the launch of PrimeScan 2 in September and the launch of XSmart ProPlus in the U.S. we have a healthy innovation pipeline. And as we couple it with better process, discipline, and focus, we see opportunity to alter the return trajectory of our total innovation pipeline. Lastly, our business transformation journey continues to take shape as we execute strategic plans and initiatives to make Dentsply Sirona a more efficient, more effective, and stronger company. And with that, I will open it up for questions.

Thank you. We will now conduct the question and answer session. To start it off, I would like to turn it over to the CEO, Simon Campion.

Good morning and thank you. In the ongoing spirit of transparency, I want to inform you all about a developing situation today in Germany. We are aware that federal and local authorities and tax investigators arrived at our facilities in Bensheim and Hanau this morning. Obviously, this is a very recent development and we intend to cooperate with the authorities. Our facilities in Germany are operating as normal and we do want to continue to emphasize that ethics and compliance is at the center of everything we do. And finally on this matter, given the evolving status of this situation, we will be unable to answer any questions on this subject during Q&A. And with that, I'll hand it back to the operator to walk us through Q&A. Thank you.

Thank you. As a reminder, to ask a question, please 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 allow only one question and one follow-up question only. Please stand by as we compile the Q&A roster. Our first question comes from David Saxon at Needham and Company. Your line is now open.

Great. Good morning, Simon and Glenn. Thanks for taking my questions. And Glenn, good luck on your next chapter. I have two questions. Yeah, great. Just two questions, one on bite, one on implants. So on bite, can you just give us an update on how long you think the suspension might last? And then in terms of cost tied to bite, it sounds like the cost in the quarter at least was around $40 million or in that range. Does that include COGS and OpEx or just OpEx? And then on the OpEx side, how much or what percent – Can you reallocate to other parts of the business if bite does go away and how much would be viewed as more discretionary?

Yeah, good morning, David. I'll take the first part and then Glenn will have a crack at the second part of your question. Listen, I would say that we are still conducting the review and all necessary analysis that go into this. It's a multifactorial assessment that involves regulatory, technical, commercial, and operational. And it does need to take into account the legislative environment we find ourselves in, recent performance, longer-term prospects of this business. And as I noted, the ongoing regulatory review, which may take time and require further investment on our part. So we want to be swift but diligent and try and get an answer to you all, but also to our employees. as swiftly as possible. We've taken very fast action on the cost side. We've ceased all marketing activities, for example. We informed all, shall we say, relevant employees yesterday that their jobs will be ceasing to exist over the next couple of weeks. And the redeployment of assets that we think can be redeployed is ongoing, but we already have moved different groups of people, such as software developers, over to other areas of our business. And so, Glenn, do you want to have a crack at the cost part of that question?

Yeah, I think the only thing we can say around the Byte P&L is the most recent quarter, we did about $40 million of revenue. That's obviously down versus prior year. It's down sequentially close to 19% or so. So the business has been declining. It is accretive to our gross margins, but dilutive to even a margin. So there's a high OPEX cost associated with this business. I think we've even said that most recently we've operated at a loss in the most recent quarter. So the business has been declining, deteriorating, and it is accretive to gross margins, but overall dilutive to our operating profit, and we're actually in a lost position in the most recent quarter. So I think that gives you a general idea about the type of op-ex this business has. And Simon mentioned we're taking action where we can to take out as much cost as possible in the short term here to minimize the potential impact.

Okay. That's super helpful. Thanks for that. And then my second question is just on implants. So we can sequentially, I guess, can you talk about the performance across value versus premium? And then As it relates to China, I guess, are you expecting that region to be down until you lap the VBP comps? And then lastly, on implants, you talked about some leadership changes. Can you just talk about kind of how you see the strategy going forward and any update on kind of expectations around returning to growth and market growth? Thanks so much.

Yeah, thanks, David. So on the value side, we saw a decline this quarter for the first time this year in that part of our business. And as we've informed you before, that represents 25 or so percent of our total business. That was impacted by some unique events. Obviously, we're lapping the China situation, so that's one. The situation in the Middle East with Turkey, They won't import any products manufactured in Israel. That's had a significant impact on us so far this year, and again in Q3. And then there's a timing issue with respect to a dealer in Central Europe as well. So that is certainly impacting us in general around electives. We saw a decline in our survey of, as I said, over 1,300 people, particularly in Japan and China. But fortunately, we saw no further degradation in the U.S. and Germany. So that's where we are with performance in the quarter. We have simply failed to live up to our own internal expectations on this. We want to communicate the value that we bring at the upper end and the low middle of the range with our MIS implants. And so we felt some change and freshening up was needed. And so we have taken that and we have the portfolio, we feel, and our customers feel to win in this place. We have invested heavily in clinical education and expansion of the sales team, particularly in the U.S. in this space. So the only reasons for us to fail are internal reasons, and so we're trying to remediate those right now.

Great. Thanks so much.

One moment for our next question.

Our next question comes from Kevin Caliendo of UBS. Your line is now open.

Thanks, and thanks for all the transparency on this situation. Can you just remind us first, like, how big Germany is for you in terms of sales or any other numbers you can provide? And then, I guess, second question, more macro. At this point, given how the macro is, Simon, as you sit there, How do you think about investment versus cost save? Like, is the macro such that it's an opportunity to try to take share as things are bad and, like, let's educate everybody and let's throw money at the problem and as things get better, we'll be in a really good situation? Or are you at a point where, hey, you know what, it's bad, let's just circle the wagons and I know you have this cost savings program, but how do you think about investment versus cost saves when the macro is just extending worse than you had imagined.

Yeah, thank you. Thank you, Kevin. So in relation to the first part, Germany represents about 10% of our total business. And it is, you know, there's quite a healthy portion of that that's in the connected technology, legacy Serona business. With respect to... with respect to cuts versus investment, I think we've said that we cannot cut our way to growth. I think we've tried to be very diligent with respect to taking out costs in certain areas of our business that are not customer facing. Just taking out infrastructure costs that we feel are unnecessary and investing in areas that will stimulate growth. in areas that are higher growth categories. For example, referring back to our Invest Today presentation, we said, hey, we believe we should be growing at market in implants, and that's a mid-to-high single-digit growth market. Strong double digits in aligners, obviously, bite has impacted that. But it's those sort of areas that we do want to invest in that we are at a competitive disadvantage with respect to feet on the street and capabilities, and also invest in, what shall I say, the hygiene of this company by getting our websites up, by getting our e-commerce up, by making it easier to do business with, et cetera, et cetera. So we see where we have come. spent money in areas that are not driving creating demand and enhancing the customer experience. And so we're taking money from there and investing it to sell ourselves up to make us, as I said in my remarks, a stronger company moving forward.

Thanks, Simon.

One moment for our next question. Our next question comes from Jeff Johnson of Baird. Your line is now open.

Thank you. Good morning, guys. Simon, just on the bite commentary you made here in the first question of the Q&A about notices going out to employees and obviously you're moving some of your other employees to other parts of the company, things like that. I mean, effectively, it sounds like you're telling us you're shutting down the business without just saying you're shutting down the business. And I understand there's maybe people issues here involved and it's a public call and all that. but at least from our side of the table, from an investor standpoint, is that how we should be looking at things at least for now? Take it out of our model, take it out of our expectations on a go-forward basis, add Infiniium, and then if it comes back, we can deal with it then, but for now, that's maybe the safe way to think about things.

No, that's not what I'm saying, Jeff. I'm saying we have a lot of work to do. It's a complex situation that we find ourselves in, and as you rightly said, A lot of people impacts in that business. We have a lot of technical work to do, regulatory work, consultation with FDA, trying to figure out a path for this project to get back to the market. And then if there is a path, what's the commercial viability of being back in the market? As Glen noted in his response to David's question, we did about 40 or so million in this last quarter. It was diluted to our business. The middle of the P&L is quite burdensome in this business. And so when we look at the legislative environment, how much it's going to take to get back into the market, then we have to determine if the view is worth that climb, if the climb is possible. So we're not saying anything about it yet. I'm not trying to duck and dive your question, but they're the facts as we see them right now.

Yeah, no, all fair. That's great. And then, Glenn, maybe help us out just, you know, a lot of volatility here these last couple quarters. Can you just kind of level set us? What are you exiting 2024 run rate savings on the cost savings initiatives? where are those cost savings expected to run rate by the end of 2025? So really kind of looking at what would be the incremental potential cost savings in 2025, we can still expect through the P&L, number one. And number two, you know, as I look at kind of that low to mid 40 cent guidance for Q4, I can use the last couple of years, I can use pre-COVID years, using a lot of different ways of looking at Q4 as a percentage of your typical earnings year to I can get to a number anywhere from $1.50 to $2 for next year. I know you're not guiding to 2025, but, you know, is my thinking correct? You know, kind of that's more the range to street sitting at 228. It just seems impossible for me to believe we can get anywhere near that next year. So kind of take that low to mid-40s and kind of apply whatever fourth quarter percentage we want to it, but kind of be more in that range I suggested. Thank you.

Yeah, thanks for the question, Jeff. I think as it relates to the restructuring savings, the first restructuring program is complete. It was completed in Q2. That was $200 million of annualized savings. We've obviously announced the second restructuring program, which is anywhere from $80 to $100 million. That's, I'd say, on track, and a lot of those run rate savings will be seen in 2025. So that's how we look at the restructuring program. Obviously, as we look at the business. Simon mentioned some of the reinvestment that we're going to be doing in the business, and we haven't quantified how much will flow through the bottom line versus be reinvested. But, you know, we're on track with respect to our restructuring programs that have been announced. As it relates to Q4 and the, you know, low 40 cent type number, I just keep in mind the bite business is having a large impact on our fourth quarter forecast. We've essentially remove all revenue associated with shipments beyond October 24th, which is when we initiate the ship hold. And while the revenue is obviously removed, there's still costs in this business that we're working through, right? And so you could take that to mean there should be less of an impact as you go into 2025 on a quarterly basis once we work through all of those items. But Nevertheless, we're not going to comment any further on 2025.

I would say just in relation to that cost statement that Glenn made, Jeff, we have stopped discretionary spending in this business, so costs are people costs for the most part right now.

Understood. Thank you.

Thank you. One moment for our next question.

Our question comes from Jason Bednar at Piper Sandler. Your line is open.

Hey, good morning. Thanks for taking the questions. Good luck to you, Glenn, in your next endeavors here. Wanted to dig in a little bit more in the CTS segment, your CAD CAM comments, and apologies if any of this has already been addressed. I'm bouncing between a couple of calls. But the lower retail demand in CAD CAM, do you sense whether this is at all coming ahead of your PS2 launch? um and then can you talk about the headwinds you're seeing and how much you'd attribute to the maybe the macro and the level of interest rates versus maybe how much might be competitive headwinds and scanners and printers uh really just trying to understand with these questions you know what might be exogenous um and you know what maybe a a cleaner trend or exit rate might look like in cad cam now that you actually have ps2 launching out there uh yeah good morning jason um because i think the the the the delta between

Retail and demand in Q1 and Q2 was pretty reasonable. And we saw a significant delta in Q3 between those two variables. It's across the board. It's not just on the scanner business. So I don't think it was related to any pent-up demand for PrimeScan 2, although we have done very well with PrimeScan 2 since it launched. We have sold in excess of 900 cameras around the world. It's been, in terms of units, it was the best quarter of scanners this year and the second best quarter for scanners in three years. So that's certainly helped us this past quarter. If we look at customer sentiment, I shared in our previous, in the prepared remarks, that it had degraded in some areas, but that Germany had stopped the degradation and actually some of the survey results came back that German customers are now reconsidering investments in their digital workflows. An interesting data point, I think you'll all agree, is that only 27% of German dentists actually have a scanner. So I think there's a lot of room for digitalization in Germany once we get past some of the macro headwinds. And those 3D printers are a small part of our business. We had a good quarter on 3D printers. We had a good quarter on mills. So we're reasonably pleased with what we sold in the quarter. It's just the retail thing hasn't had an impact. Given the survey data that we have, we want to be cautious moving forward.

Okay. All right. Fair enough. And then for my follow-up, maybe a little bit bigger picture and maybe a little bit of a follow-up to what Jeff had just asked. And I don't mean to be critical here, but when we think strategically about the savings plans you've had in place, shareholders really haven't seen these materialize at the bottom line. earnings are basically flat year over year. That's despite headcount coming down, or sorry, share count coming down by about 5% this year. You've talked about deploying a large chunk of those phase one savings, even some of the phase two savings back into growth initiatives, but the growth just hasn't really materialized. So the question here is, you know, how or whether you think about reevaluating maybe some of those business investments, whether the returns on that spend justify the investment and, Does there come a point where you'd look to drop more to shareholders at the bottom line so that you can get back to growing earnings?

I think that's an entirely fair question, Jason. That's one that we think about here frequently. As I noted in my response to Jeff's question, there are areas of our business where we have been under-resourced and are out fought in the trenches, and those areas are We feel represent areas of growth in dentistry and for DentSplite Serona in particular. I noted in response too that we don't think we can cut our way to growth here. We have the portfolio. We have been investing in sales teams, in clinical education, for example. We're fixing the software piece on SureSmile. We've got this headwind with Byte. you know, driving top-line growth is of considerable importance to us, preeminent importance to us. And we feel the investments that we are making will get us there. We've demonstrated with aligners where we expect we grow. We posted very solid growth in Europe this year and indeed in the rest of the world. In North America, our Sure Smile business, if you exclude that one a partner where we have a significant headwind with. We actually grew mid-single digits. So the areas we invest in, with the exception of implants, we are unlocking value. And the great work that's been done on the other hygiene factors, such as operations, is going to show significant benefit when the macro turns and we begin to get the true leverage from the actions that we've taken to make Dentsplice Roan a more efficient company.

The only thing I'd add to Simon's comments are our operating expenses year over year are going to be down. So I think the challenge we have is the revenue levels are coming down faster than that. So we are seeing a reduction in overall operating expenses as a result of the actions that we have taken. But we have a revenue challenge, which is why EPS is flat year over year.

And we haven't returned over $300 million, I think, or so this year, Glenn, to investors in former share buybacks and dividends.

All right. Very helpful. Thank you.

Thank you. Our next question comes from John Block at Stiefel. Your line is now open.

Great. Thanks, guys. Good morning. Glenn, for 4Q, the implied 4Q organic, and that might be down high single digits or so when we tie out. So do we think about maybe a 400 basis point year-over-year impact from bite, some impact from the EDS pull forward into 3Q from 4Q to 20 mil? I guess where I'm trying to go with this is we all sharpen our pencils on 25. Just to arrive at like a normalized core revenue for 4Q, you know, optically, again, it might be down high single digits is a little difficult, but do you think it's fair to say maybe it's closer to down low single digits when we make some of those adjustments, again, most notably the BITE and the EDS pull forward, just as we can get a better sort of jump off our trajectory into 25?

Yeah, I think if you look at the organic growth implied guidance for Q4, it's down high single digits. And keep in mind, there's $20 million of consumables revenue that we called out relative to being pulled forward from Q4 into Q3. So you'd have to adjust $20 million for that. And then really the rest of the decline is coming from the bite situation. And just to put in the context, right, so we stopped shipping on October 24th. And so the rest of the quarter revenues on a $40 million type business or from a quarterly perspective is out of the numbers. So you can do the math on that to figure out what the impact of bite is. And then the rest of it's coming out of North America and soft retail demand. So that's how we're looking at Q4 right now.

Okay, got it. Fair enough. And then so I'm just a bigger picture question. There's, you know, I guess some chatter out there on MA for Dental and there's a good amount of talk about benefits being reduced and what that does or doesn't mean for the dental industry and maybe more specifically implants. So, you know, we'd love your thoughts on how you view that going into 2025 and what that may or may not mean for the implant market and maybe even more specifically Dentsupply Sharona's initiatives, most notably in North America for implants. Thanks.

Yeah, thanks, John. Definitely on top of macro, these reductions in benefits I think are going to have an impact on customers' willingness to pay more out of pocket for implants, perhaps for aligners and so on. So I think we will see an impact. But to turn back again to Jason's question, They are still segments that are attractive growers when you compare it to core dentistry. And so we would still feel that continuing to invest there and get rid of the internal cobwebs that we have to get growth in those areas is still an area of immense interest for us. No doubt it's a headwind coupled with macro interest rates, the lack of willingness to invest in capital equipment, and then these recent patient downturns that we've seen, particularly in Japan and China. I think we're in for a slightly longer period of compression here than everyone had hoped.

Thanks for the call.

One moment for our next question. Our question comes from Erin Wright at Morgan and Stanley. Your line is now open. Great, thanks.

Could you give us an update on just like the distribution channel, your relationships there and kind of the conversations, how those have been going since kind of the recent disclosure around sort of revisiting some of those relationships. And so how do we think about that, the importance of distribution across your business and also kind of what's in the channel, some of the stocking dynamics pull forward, just how we should think about that. Thanks.

I'll take the first part, Aaron, and then Glenn can comment on the channel stocking. We are still heavily reliant on our distributors. They do great work for us. With respect to our friends at Patterson, we continue to work closely with them day in and day out. In fact, we had a senior level meeting with them over the past couple of weeks. We continue to be in discussion about the points of contention between us. And we hope that we get to an amicable solution here in the not too distant future. But as I noted back in Q2, we do a lot of great work to enable their success. And so that's the crux of the challenge that we have. And Glenn, do you want to comment on the orders?

Yeah, no, just in terms of orders, we saw healthy orders from our dealers in the third quarter. I mentioned we had a $48 million sequential increase from Q2 to Q3 in our equipment business. Part of that's normal seasonality with DS World. Also saw an uptick in orders from PrimeScan2. And I would just highlight that, you know, with that dealer inventory increase, there were no special incentives provided to these dealers surrounding that. And that compares to 28 million sequential increase in the prior year. So it was a situation that created elevated inventory levels, and we're just being careful given what we're seeing in terms of the retail demand as we move forward into Q4. And then I mentioned earlier also the $20 million increase in dealer inventories associated with consumables, and that was directly associated with our ERP conversion and making sure that we minimize any risk in Q4 around that whole conversion. So That was intentional. Again, no one's special incentives were given associated with that, but we got our orders in earlier and got some of that delivered in the third quarter.

Okay, thanks. And then just on skew rationalization, you commented on it earlier, but has there been any changes in terms of that cadence or where you're at now in terms of this skew rationalization efforts and And just remind me, like, that doesn't necessarily meaningfully impact the top line, right, for you, or are you thinking about that differently in terms of the mix?

Thanks. Yeah, no major changes since our last update, Erin. We expect to have all the non-revenue SKUs gone by the end of the year, and we expect the majority of revenue-generating SKUs to be migrated by the end of 25. So that's no material change to our thinking. since our last update.

Okay, thank you. Thank you. One moment for our next question. This question comes from Michael Cherney at Learneck Partners. Your line is now open.

Hi, good morning. This is Ahmad on for Mike. Looking ahead, How should we think about what ortho organic growth should be excluded by, assuming the team can be more focused on SureSmile? I know that there are investments that companies make in software and the push into the ortho market. And lastly, how would you characterize the current and expected uptake in SureSmile with those orthodontics? Other than the software update, is there anything else that's keeping SureSmile back, so to speak, from branching into the ortho space more? Thanks.

Good morning. Let me start with maybe the second part of your question. Our sales team, our commercial teams, for the most part, focus on general dentistry. And so that's the majority of our customers. Sure, small revenue comes from that group of clinicians. As we noted on our last call, when we get the front end of the software fixed, because that's the general feedback that we get from the community, is that then we will invest in a commercial team to begin calling on orthodontists to try and accelerate even more growth. Obviously, that's a Our competitive friends won't take that line down, and it's going to be a turf battle. But we do feel that the clinical offering that we have, based on fewer refinements and fewer anchoring points, confers an efficiency benefit to clinicians, whether they're GPs or orthodontists. In relation to your comment about sure small growth, I think our comments from earlier, you should consider those. We've grown very healthily in Europe and those areas where we've invested, like Japan and Brazil. And if you listen to my comments, I think excluding that one That one partner that we had that has stopped purchasing, we grew in the mid-single digits on SureSmall in North America. So we cannot foresee any reasons why that would not continue. And then back to linking it back to Byte, as I noted in the prepared remarks, we have some talented people at Byte on the software and demand generation side. And we will likely be deploying some of those to help us with the SureSmile software and to help us stimulate some further awareness of SureSmile as a very significant brand in the clear aligner marketplace.

Got it, thanks. And if I could sneak in one last one. The revenue generating skew reduction in 2025, any idea of the impact that has on top line? Is that, if I'm correct, mostly coming from the EDS segment?

Yeah, so I don't think we've ever shared what the impact would be on the top line. Obviously, we've been very cautious about that. And it is primarily focused on the endo and resto businesses today.

The work is focused on those businesses today. All right. Thank you.

Thank you.

Our next question comes from Brandon Vasquez at William Blair. Your line is open.

Good morning, everyone. Thanks for taking the question. Simon, can we go back maybe for a second on implants? And I'm kind of curious. I'm sure you guys have done kind of a postmortem internally where you expected to be today. And I know you're kind of adjusting things on a go-forward basis. You're hiring new leadership. But what was it you think that hasn't gone to plan in the past couple of quarters or year or two just to better understand where you guys are, what hasn't worked, and what needs to be fixed still on a go-forward basis?

Yeah, thanks, Brandon. I think the investments we've made in commission plans and the number of feet on the street in new products, new product development that we've introduced over the past couple of years and a very significant investment in clinical education I think are all the right moves. And so it comes back to are we equipping our team in the right way to be successful in the marketplace against a very strong competitor with a very robust portfolio and We just have to be far more aggressive and equip the teams in a far more meaningful way to convey the value of our products at the top end and at the middle of the implant market. So net-net, our rate of new accounts has not offset the decline that we've seen over the past several years. So we just have to go and do a reset. But again, everything we have heard, Brandon, there's no reason why we should not be successful in this marketplace. Our sites were not that egregious. Let's grow at the market rate. That was the plan for 2026. Let's be at market growth. So I don't think it was an egregious or aggressive plan. I think it was a fair plan. We have not delivered, so we have to go and do a further postmortem and hold people more accountable to commitments that have been made.

Okay. And maybe one quick follow-up, if I could squeeze it in real quick. You guys had mentioned hiring a new virtual internal sales team. I'm just curious if you could give us examples of where you envision that virtual sales team really plugging into the commercial organization and when you might start to see some P&L benefits from those investments going forward. Thank you.

Yeah, thanks, Brendan. So as I noted in the prepared remarks, we have in excess of, I think, 75 of these individuals fired right now. They're actually starting to make calls today to customers in a specific region in the U.S. We would expect that they will begin generating revenue for us in 25, obviously. I mean, 24, it's very late, but they have to build relationships with the targets. The targets, I think there's opportunity across our portfolio. Certainly, I would say in the EDS side, it's probably a little more straightforward to get there. But when we look at the account breakdown of customers that we serve, I think we leave a lot of money on the table. We have a long tail of accounts who purchase only a couple of thousand a day. only a couple of thousands of dollars worth of product from us each year. And I think there's an opportunity in that type of account to get a slightly bigger slice of their business. So that's what they're focused on. And it's all about getting closer to the customer, creating demand for whatever channel is served by that particular product line. So if it's endodontics, we will serve it. If it's preventative or resto, Sign or Patterson or other distributors in the U.S. will serve it. But it's all about getting the Dentsply name out further into the dental community, demonstrating the value that we can bring and trying to earn the right to acquire some more business from all 150,000 dentists in the U.S. Thank you.

Our final question comes from Alan Lutz at Bank of America. Your line is now open.

Hi there. This is Dev on for Alan Lutz at B of A. I just had a quick question on implants, just following up on the conversation there. You know, considering some of the commentary and sitting below expectations here, One, you know, should we still think about getting to market growth in 2026 as an expectation? And just curious, you know, what you think about any additional investments needed there on product or pricing changes given some of the competitive landscape and changes there? And what is required to get, you know, to market growth in 2025, sorry, in 2026?

Good morning. I don't think we're going to provide any more guidance at this point with respect to 25 or 26 growth or lack of growth in implants. I don't think it's an egregious thought that we should be growing at that market, as I've said in response to the previous question. The work that we've done to assess our portfolio has said, as we've noted several times, that we don't have any major gaps. We have invested in clinical education. Maybe we need to pivot that and drive more local education and get at these referral networks that seem to be causing us the challenges to unlock those. I think quite simply it comes down to our own ability to execute and to equip our reps and educate our reps to have robust conversations with the implantologist community, the referral network, and do it in a much faster way. Not have this long sale while they filled up their reputation, but get out faster into the marketplace and begin creating demand. It's a multifactorial issue, as I used that word I used earlier on, and we are disappointed with where we sit today on implants. That is for sure.

Absolutely. And then just last one from me. I think, you know, at the investor, there was a mention of a $30 million gross benefit, gross profit benefit from skew optimization efforts through 2026. Seems like skew optimization efforts are progressing well. Could you just give us an update on where that stands in terms of the gross profit benefit? And if that's something that's more of a 2025 event or 2026? Thank you.

Yeah, so I think we just noted that for all intents and purposes, all our transformational efforts, including SKU optimization, are on track. And that will provide a more robust update when we do year-end earnings in, I guess, late February. So that will be our thoughts on that. But there are no alarms ringing with respect to SKUs right now.

Thank you.

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to our CEO, Simon Campion, for closing remarks.

Thank you, operator. So in closing today, I want to express my thanks to you all for joining us and to the entire Densply Cerulean team for their commitment to our customers and our ongoing transformation of our company. While we know we have lots more to do, we are making progress. We are bringing innovation to the marketplace, and we are creating a more disciplined, accountable, and then splicer on a first culture that will benefit all stakeholders over the long term. Thank you for your time today.

This concludes today's conference call. Thank you for participating. You may now disconnect.