Q3 2019 Earnings Call
Gentlemen, thank you for standing by welcome to the third quarter 2019, Dentsply Sirona earnings Conference call. At this time all participants are in listen only mode. Later, we'll conduct a question and answer session.
If you'd like to ask a question during the question and answer session, you'll need to press star one on your telephone as a reminder, studies program. He will be recorded and now I'd like to introduce your host for today's program Mr., John Sweeney Vice President Investor Relations. Please go ahead Sir.
Thank you John It doesn't good morning, everyone welcome to our third quarter 2019 earnings conference call I'd like to remind you that earnings press release on slide presentation related to this colder available on our website at www Dot Dentsply Sirona dotcom before we begin please take a moment to read the forward looking statements on earnings press.
During today's call will make certain predictive statements that reflect our current views about future performance and financial results. We base. These statements in certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of our most important risk factors could cause actual results to.
Differ from our predictions and with that I'll now turn the program over Don Casey Chief Executive Officer Dentsply Sirona.
Thanks, John and thank all of you for joining us on earnings call.
As you can see from our materials, we had a solid third quarter.
Our results show that we were making progress against our restructuring plan as measured by both our financial results as well as important executional milestones.
Looking at the financial highlights from the quarter internal growth reached 7.5%.
Above our expectations on higher than anticipated prime skins shipments and improve consumable sales.
A combination of solid sales growth and continued operating discipline contributed to a 510 basis points expansion in our operating income margin versus the prior year.
non-GAAP EPS for the quarter was 57 cents up 51% versus year ago.
Operating cash flow was strong at $159 million up 27% versus the prior year.
In addition to the financial performance, we saw progress in many important areas.
We had a robust product launch program in the third quarter.
Organization launched new loyalty program as part of our overall.
Our overhaul of the promotional strategy and we saw progress in multiple countries and building out our Salesforce effect. This program.
On the corporate governance run we announced the appointment of Jennifer just to our board of directors. So overall, while we understand theres a lot to be done the third quarter shows continued progress and gives us reason to be optimistic about a future.
I'll now hand, the presentation over to Jorge to review our financial results.
Thank you Don.
Before I dive into the details of our performance I'd like to take a moment to express how excited I asked the joint Dentsply Sirona.
We are well positioned in a very attractive and evolved in space in health care.
Commitment of the board of directors and approximately 15000 associates around the globe use our scale and capabilities to enable growth, it's very clear to me.
We have tremendous products integrated solutions any great commitment to innovation.
These are all key ingredients to pursue and deliver sustainable growth.
Turning to Q3 non-GAAP results on slide eight.
We are pleased with the early results stemming from our restructuring plan.
This clearly demonstrated in our solid third quarter performance with strong sales growth considerable margin expansion and substantial improvements in es and operating cash flow.
Third quarter sales of 951 million were up 2.9% versus last year.
When any internal growth basis sales increased 7.5% driven by strong growth in technology and equipment and improved performance in our consumables business.
Third quarter revenues came in ahead of expectations if function of solid execution by our teams who deliver more prime scan units unexpected.
In addition, consumable sales were higher than anticipated, partially due to timing of orders and shipments.
Currency was a revenue headwind of approximately 2% in the quarter, mainly due to the strengthening of the U.S. dollar relative to the euro.
Gross profit was 548 million or 57.6% of sales up 219 basis points as compared to prior year.
More than 50% of the gross profit margin improvement was driven by our efficiency and portfolio shaping initiatives.
Favorable pricing and positive FX accounted for most of the remainder of improvement.
Total s. DNA of 376 million was 4.1% better than prior year.
S DNA as a percent of sales improved 290 basis points to 39.5%.
Our teams continue to do a great job executing an operational and portfolio initiatives and these airports accounted for the majority of the margin expansion.
Operating income increased 43% to 172 million in the quarter.
Operating income margin of 18.1% expanded 510 basis points versus last year.
The tax rate for the quarter was 24.75%.
And third quarter, EPS was 57 cents up 51% year over year.
Moving to segment performance when it's like nine.
The consumables segment accounted for 44% up our sales.
In the third quarter consumable sales were 460 million up 1% and up 3.2% on internal sales growth basis.
This performance was driven by growth in restorative and Endodontic products.
Upsetting part by declines in our laboratory products business.
I see you may recall last year's consumables performance was impacted by disruptions are been little distribution facility in Europe .
As Don said, we're changing our promotional strategies as a result of this shift we're expecting and even growth in our consumable sales over the short term.
An example, the types of changes, we're making is our one the S loyalty program, which was launched in September .
This program rewards dentists for purchasing Dentsply sirona consumables, both through our distribution partners in directly from us.
While it is early in the execution of these program we're encouraged by the results.
One D.S. He's an excellent example of how we are executing on two key operating principles owning our own demand creation and approaching the customer as one than supply sirona.
In the third quarter consumables operating margin was 27.3% an increase of 250 basis points as compared to prior year.
Mainly driven by efficiency initiatives and positive pricing trends.
On slide 10, we highlight our technologies and equipment segment, which accounted for 56% of sales.
Third quarter T. any sales were 535 million up 4.5% versus prior year, representing a strong 11% growth on an internal basis.
Key drivers of these growth, where digital dentistry, which includes the CAD Cam and orthodontic businesses and health care.
Offset impart by equipment and instruments performance, mainly a function of the ongoing competitive pressures in our imaging business.
Growth in digital Dentistry was strong it resolved with the successful primes can lunch.
In the third quarter, we had higher than anticipated manufacturing production of primes, Ken we continue to work hard to manufacture enough units to satisfy the robust demand, which is partially fueled by the recently announced upgrade program in the U.S.
You know October we announced that previous generation CEREC owners in the U.S. market.
[noise] upgrade to prime scan with an attractive discounts.
Although you as digital impression system owners can also take advantage of price can.
<unk> upgrade offer.
We expect the upgrade program to add to our overall sales performance and anticipate that he will be accretive to our overall financial results.
Technologies equipment operating income margin was 19.6%.
1020 basis points as compared to prior year.
About half of this improvement was due to higher sales growth fueled by primes, Ken and the high level of dealer de stocking last year.
The remaining margin expansion was driven by our efficiency and portfolio shaping initiatives.
On slide 11, we present, our business performance on a regional basis.
You as sales of 336 million increase 1.5 per cent compared to the prior year and increased 4.6% when an internal sales growth basis.
We experienced solid growth in our technologies and equipment sales driven by frames can and the impact of dealer inventory de stocking in the prior year.
U.S. consumable sales declining the quarter, but improved as compared to the second quarter.
European sales were 352 million up 2.7 per cent compared to prior year and up 8.4% on an internal sales growth basis.
The European sales increase was driven by prime scan.
Consumable sales so it's solid increase versus last year. However, please remember that we experienced shipping disruptions are at or Vandal European distribution facility in the third quarter of 2018.
Breadth of the worst sales were 263 million up 5.1 per cent compared to prior year and up 10% on an internal growth base.
The any growth was mainly driven by primes can sales as we started shipping to some countries that had not previously received regulatory approval.
Consumable sales were slightly positive in these regions.
Moving on to slide 12.
We generated strong operating cash flow of hundred 59 million in the quarter.
We are increasing our focus on making her operations more capital efficient and we're continuing to work on improving our cash conversion cycle.
Free cash flow was headwind 36 million in the quarter capital expenditures were 23 million.
During the quarter, we bought back 1.9 million shares for a total of $100 million repurchase under our outstanding authorization.
In addition, we pay 20 million in dividends, resulting in a total of headwind 20 million returned to shareholders during the third quarter.
Including share repurchases and dividends, we have returned to shareholders over 50% off the operating cash flow generated year to date, while sufficiently funding our key initiatives.
Capital allocation is a priority for me and then supply Sirona, we will continue to follow a disciplined and prudent approach to assessing a specific capital deployment options for the corporation.
Our first priority will remain investing into business to make sure our restructuring is successful and to enable sustainable growth.
We have a dividend, which consistently reward our shareholders.
We will be opportunistic about share repurchases as we were.
In the last quarter.
Disciplined portfolio management is of high importance to us overtime, we intend to optimize our portfolio by shedding underperforming assets and adding capabilities to drive sustainable growth for Dan supply Serrano.
Moving to slide 13, where I will share our expectations for the rest of the year.
We are pleased to a liver Q3 results that exceeded our original expectations and importantly, we are seeing our performance improvement initiatives gain traction.
As a result, we are updating key elements of our expectations for 29 team.
We now anticipate internal sales growth for the full year to be towards the upper end of the guidance range of 4% to 5%.
We're also increasing and narrowing our EPS guidance from the previous range of floors, and 35 cents to $2.45 to the new range of $2 I'm 42 cents $2 I'm 48 cents.
Regarding our long term financial metrics and aspirations when it's like 14, let me make a few comments.
On the one year anniversary up the announcement of the restructuring I'm pleased to say that we're making substantial progress towards achieving these objectives.
Our products and commercial initiatives are gaining traction and we believe will enable sustainable internal sales growth in the 3% to 4% range.
By the end of 2019, we expect to have completed approximately 85 million of cost savings and we remain on track to the liver default 202 225 million savings by 2021.
To achieve these savings we expect about headwind mill hundred 80 million of restructuring charges about 110 million of which will be cash.
We have made good progress in improving margins without Justin operate adjusted operating income margin up 290 basis points year to date and.
And our cash flow and liquidity continue to improve.
I think new member of the team I'm committed to much to the achievement of these goals we have to use the scale of our assets and innovation capabilities to the liver returns in alignment with these aspirations.
Our approach to executing this plan will remain structure decisive and mindful of the right investments required to drive long term growth.
With that I will now turn to call back over to dawn.
Thanks for a great heavy part of our team.
I wanted to provide some additional perspective on a restructuring and build off some of the area as highlighted by Jorge.
On slide 16, you can see the outline of or in November 2018, restructuring, which was focused on the priorities of revenue growth margin improvement and organization simplification.
The key priority has always been driving revenue growth.
Remember that our plans have been built around accelerating new products, improving demand creation and driving clinical education.
In terms of new products. The biggest change we've made has been moving to a portfolio approach across our R&D projects.
This process forces focus on which projects can generate the largest impact on the entire company and take full advantage of our unique portfolio.
Moving now to slide 17.
It is clear that our strategy is beginning to work as evidenced by the step change in new product launches that we are seeing and 29 team.
We continue to see strong momentum from our prime scan launch as we introduce into new regions around the world.
Prime scan is the gold standard and the dental scanning technology area.
It is more accurate faster easier to use and integrates seamlessly into dental practitioners workflows.
We also launched arc 5.1 software, which represents a performance upgrade for Sarah.
The addition of or a check allows the dentists to visualize three dimensional changes from virtual optical scans overtime on their own computer, creating a valuable new diagnostic tool.
Now looking at slide 18, where we highlight some of our third quarter U.S. product launches.
We introduced the Astra Tech EV implant system, which was developed to provide excellent stability for improved outcomes. It any type of bone.
This implant system works well in either delayed or immediate load cases.
In the emerging space, we launched a new ships sensor one that generates excellent image quality, even at lower X rays doses.
In addition, our imaging business will benefit from the U.S. launch of new versions of the Orthophos E S and SL panoramic imaging lines.
The true anatomy Endodontic file system is an important new product in the underwear and finally, we officially launched our partnership with carbon for the three D printing of digital ventures.
In all it was a strong third quarter performance from our R&D team and we expect that momentum to continue.
In order to realize the full value of our innovations. It is critical that we have a world class commercial engine.
This has been an area of focus for Dentsply sirona over the past year.
The charge here has been simple how do we improve our demand creation process.
In the third quarter, there's been a lot of activity that demonstrates the breadth of this initiative.
Moving onto slide 19, as Jorge mentioned, the third quarter saw the launch of an important new loyalty program named one D. S. For the very first time, we're rewarding customers for their purchases across the entire Dentsply Sirona line.
This highlights the ship, we've been making in or promotional program. We're more focused on building relationships with Dennis delivering clinically relevant products arming our salesforce with impactful tools that advantage to us in the marketplace.
And at the same time give strong incentive to Dennis to try or new products.
We've just passed the six month mark of putting our Salesforce effectiveness program in place in the U.S. So far the results have been encouraging.
Based on what we've learned we will be rolling or Salesforce effect is program two additional countries around the world over the next few quarters.
Moving on to slide 20.
Another example of improving or demand creation activity is DS World. This is a program unique to Dentsply Sirona and this year, we brought together over 7000 dental professionals for a full program of continuing education and practice management improvement classes is unlike any other event in the industry and helps position.
Dentsply sirona positively in the eyes of the Dennis.
This year, we saw major step up in attendance, which is important given that the yes world is that dynamic product launch platform.
At DS World, our revamped salesforce capabilities were on full display.
Our salesforce now utilizes a common CRM system that allows us to talk to the customer in a single voice our newly deployed clinical development managers engage our high priority customers from a single point of contact and now with a single loyalty program.
Moving to slide 21.
In addition to revenue growth the second priority the restructuring was improving our margins we've taken a number of steps here, including portfolio management, focusing on fixed cost reductions and taking a disciplined approach to spending.
Our simplified organization structure now includes a centralized supply chain function centralized procurement in other ways, we can take advantage of our scale.
These efforts helped drive the 510 basis point improvement or why margins this quarter.
I would also note at this point, we have now exceeded the head count target outlined in the restructuring plan of 15000 to 15300 for the past two quarters.
Before he and I would like to acknowledge and thank the entire Dentsply sirona team for all their excellent work.
With all of these initiatives, we are mindful of need to create consistent and sustainable improvement.
The management team recognizes that we have a lot of work in front of us, but as we look at our pipeline going forward.
The progress we have been made in improving our innovation process, our commercial effectiveness and our simplified organization. We have good reason to be optimistic about the future.
With that I would like to thank all of you for joining us today, and we will now move on to questions John .
Operator, we'd like to open for questions at this point in time. Thank you.
Ladies and gentlemen, as a reminder, if you have the question at this time. Please press Star then one not your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the Q. Please press the pound key our first question comes from a line of Tyco Peterson from JP Morgan Your question. Please.
Hey, thanks.
Let's start with consumables up a little bit more than we'd modeled in a quarter I know you're talking about the DS loyalty program can you talk a little bit about how you think that flowing through the next couple of quarters. Obviously, you have a tough consumables a comp in the fourth quarter and I think the implied ramp is still about 4.5%. So how do we get comfortable with that step up against a tougher comp in the midst of kind of rolling out to see us.
Loyalty program for consumables.
Yep.
Oh, thanks for the question.
Look we've set a couple of times that we think the consumable progress is gonna be a little bit on even over the next couple of quarters.
And it's really the result of the change in the promotional program and you know one DS in our mind is a great example of what we're trying to do.
You know we had a very successful launch of that program in the U.S.
DS World we exceeded.
The number of Dennis we thought that would sign up for it and the results we've been seeing from the Dennis that have signed up has been very very encouraging. So again, we see the underlying activity that we're we're putting in place as something that is once we get through some of the promotional short term choppiness is going to drive demand for our products that the second thing I would and I.
Take a you know this.
Obviously, our resto business and our Endo businesses are big strong an important business for us and we feel pretty good that we now have some innovation lined up which has been lacking in those two particular areas over the last couple of years I mean, if you look at the rest of business with short for 1360, you know, we're feeling pretty good about that we've had a.
Very good reaction to true anatomy.
Which is really the first new theory of how you should be managing root canals, and while and our Kale wells and as Weve rolled that out weve seen positive response so.
Look I think our Formula is we've got to innovate at a faster clip than we have in the past we are feeling very good about our clinical education programs and the final issue is you know we have changed our promotional programming and things like one D.S., which is off to a very good start are things that we believe will allow us to deliver sustainable.
Growth over the.
The next year.
In terms of the specific fourth quarter comp, we recognize that we've taken that into account with the guidance that Jorge provided.
And on the innovation front, no mention assure smile and the new products like just curious why that was admitted and how you're feeling about that rollout.
We're feeling great about sure Smile, it's interesting.
In retrospect, when we put all the materials together, we said we should have said something about sure smile.
I would just say first we've been trying to focus the communication here on what were the macro drivers for the entire company and while we're feeling very good about sure Smile and believe it's making significant progress it's not big enough to drive the entire companies. So we didnt included as a company driver but.
Sure Smile is right on track.
Against the plan, we've put out for it we are increasingly optimistic based on what we saw at DS World and the reception that circ doctors had to it and we think it's clearly a growth driver for the future just right now it's not big enough to drive the entire company.
All right and if I get asked one last quick one your equipment numbers were good we heard from your biggest pure about slowdown in developed markets on the equipment side doesn't seem like Youve seen anything is that fair to say and can you comment on October hurdle.
Sure.
Yeah, let's let's divide some of that up I mean, obviously, we're very happy with what's going on with Prime scan and and we continue to be gratified with the reception that's how the marketplace.
In his prepared remarks.
He also mentioned, though that we've seen some continuing challenges in the imaging space you know whether that's from competitive pricing pressure. It's certainly been an area of focus for US we feel that we missed the wide field of view innovation.
And.
Basically what we're talking about right now with the new Schick sensor. We finally got the Orthophos line, which gives us a much more competitive lineup available in the U.S. and you know one thing that we're starting to really try and understand is you know do Dennis look at their capital spending in kind of a bucket. So if they're going to go by CAD cam or they're going to be a little softer.
Across other parts of the line. So overall, we're extremely happy with our technology and equipment line and again, that's led by Prime scan, but there's some things that we got to work on.
Okay. Thank you.
Thank you. Our next question comes in the lined up Jeff Johnson from Baird. Your question. Please.
Yes. Thank you. Good morning, guys are gone I wanted to follow up on your consumable comments I think in the answer to Tyco. There you talked about sustainable growth in consumable kind of heading into next year I just want to push on that a little bit I mean, obviously, you've got the venlo noise from third and fourth quarter here, we'll get passed that but as you get into next year. It sounds like you do still feel comp.
And regardless kind of market, maybe being flattish on the consumable side that you guys can grow above that a and then in Oh no. We recently rail we kinda talk about some big growth rates. We're hearing about in your T.S. World account. Those those are Dennis who have signed up your loyalty accounts.
Are you seeing kind of sustained big growth in those accounts and is that one of the drivers that know how to think about consumables growing for you next year, even if the market doesn't a whole lot.
Yep Thanks, Jeff.
Let me there were a couple of questions in there let me make sure I answered them. So do we think that.
Given the innovation clinical education, and the promotional programs were putting behind or consumable business. Once we clear the venlo noise and some of the promotional shifting yeah. We we think that we should be able to grow at at the levels that we've talked about in our restructuring which is long term. We think consumables can be a two to three and look you know every day.
I come to work trying to improve on that.
That's the first part of the question. The second part was you know what are we seeing with one D. S.
First we were very very happy with the response rate, we got to Dennis signing up D.S. World, which is really when we launched the program second we've been really gratified by the support that our partners have put behind it.
And you know, they're recognizing that this as an opportunity to create volume there. So again, we're we're getting good expansion of the one d. as program. The results you know we're kind of a month then we've been very very encouraged you know and I know you were at the US World and you know if you were able to talk to some of the Dennis as well as some of that.
U.S. folks that are really focused on this program. We believe it is a long term driver for US you know the only thing, Jeff I'd say and I don't want to diminish.
The importance of this if you go back and look at our consumable business and we get a lot of questions about what do you think the base consumable level.
Of growth is and things immediately kind of focus on channel dynamics I go a little bit further upstream and sit there and say okay. What is the last substantive endo launch that we've had in our space and it's been a while.
If you look at our rest of business, which I think as.
Well run business for us, but we really hadnt seen a big launch in close to 18 months. So you know again, if we can opt the cycle of real innovation, that's going to provide benefits to the Dennis whether it's time saving or better clinical outcomes. You know that's we think is really really important to us and I'm starting to feel a lot better.
About the pipeline that we haven't our consumable space.
Yes. That's helpful. Thank you and maybe a quick follow up question just for Jorge or maybe down for you just on the about I guess, it's 125 million in cost savings remaining over the next two years to get to that 200 to 225 million number.
2021.
Those cost savings are gonna be helpful to the model.
To help us understand kind of somebody offsets to the 10th or potential offsets to those though.
It sounds like maybe R&D investment should do want to sustainably take a little bit higher it would seem like you're ahead of.
Head count reduction count that you've talked about in the past, but I think there could be some people and maybe infrastructure investments going back into some other markets overtime, obviously pricing hasn't been overly helpful. On the imaging side or some other parts of the market. So just how do we think of the offsets those cost savings or can those cost savings flow straight through to the bottom line.
Hey, Jeff This is Jorge thanks for the question.
You know obviously, we're trying to balance out all the priorities that we have a that company and so that include we have Bob aspirations and targets for for margin expansion. So a lot of those savings will absolutely help get as it there.
In order to get to those margins, we also need to drive the topline and when he to make sure that.
We invested in novation. So you've made the point about R&D. We are extremely focused on R&D and Don just talk about pipeline and consumables. So some of those savings will be reinvested and not developing or propelling our top line up there is also all the things that we will be.
Doing that that will be used to fund all the investments that not necessarily come from from from this savings. We have thought we are improving our discipline from a commercial standpoint in terms of how we use our promotional dollars, we're putting a lot of attention to pricing right now Thats one area, where for example, we just Uh huh.
Yeah, we recruited a global head of pricing and we are going to be able to benefit from the work in that space and those type of benefits will be.
Reinvested into business and some of that will will flow through the bottom line choice is going to be a combination is gonna be balanced approach trying to hit all the targets that we app that we have in line.
Thanks, guys.
Thanks, Jeff.
Thank you. Our next question comes from the line of Britain <unk> from Jefferies. Your question. Please.
Hi, Thanks, good morning.
Don just curious how you're feeling about the implant franchise.
You speak to growth in the third quarter, and then just how differentiated the new Astra ERP implant is and whether that's available globally now.
Yes, Thanks, Brendan personally I'd like to avoid putting any implants in my own bounce, but you asked more generally I think.
You know look our implant business is one that we're focused on its big it's profitable you know, it's basically been holding serve it's up a little bit down a little bit over the last couple of quarters.
We think we have to do a better job on or implants, because if you look at what the category is doing its clear that we're losing share by just basically posting.
De Minimis growth.
We've done a number of things to really in my opinion begin to focus on how do we grow that business. We mentioned last call that we've put a new leadership team in one of our best people and this team is making real progress we're starting to treat all our four brands as well as our myos value brand as part of a portfolio and being very thoughtful about how we look at that.
That we've really combined R&D efforts and we have a very clear path over the next couple of years in terms of how we need to not only evolved to keep up with the category, but get back to the point, where we are the innovator in the category, which is where on close and asked or came from.
In terms of you know our our ERP system.
We feel is outstanding and we wouldn't have launched it unless we feel that it's got a competitive advantage.
We had been missing an immediate load screw we think our design is novel and clinically differentiated.
You know, we the feedback we've been getting from or care wells has been very very strong and.
Again the reaction.
When we finally deliver real news is like GE, you know weve really kind of been waiting for an immediate load screw we've got that but you know in my mind implants is more than that I think we have an opportunity. If you look at our Atlanta. This franchise, which is a custom butman. If you look at the fact that we've just really started expanding RMB.
Yes value.
Brand around the globe. We continue to think we've got a lot of runway there but I.
I would sum it up by saying implants is is not tracking with the category over the last three or four quarters. It's kind of been neutral you know, there's been a quarter, where it might be up <unk> percent down <unk> percent.
But it's really in my mind critical that we at least begin to hold share and then look to expand beyond there. So I would put this franchise in the needs improvement area.
Makes sense for question for you Jorge just first came spike out the impact of currency on gross and operating margins in the third quarter and then you have an update for us in terms of Capex for the full year.
Sure.
Currency as I indicated in my prepared remarks, the on the topline.
FX was was a significant headwind was just over 2%. The majority of that Im impact came from a from the euro and a lot of that dropped down to the gross margin obviously within gross margins are or elements.
In terms of cost that some offsets some of the up in negative.
Headwind, but net net.
Topline perspective, it was pretty negative mostly the you know.
With respect to capital expenditures.
We in the corner, we had about $23 million.
Investment we continue to improve the rigor that we are applying to the approval of projects and we have a very very good process internally we are.
Investing in the area that were are aligned with the priorities of the company and that that resulted in a little bit of a.
Lower number this quarter, but overtime, we believe that.
We will be funding all the capital requirements that we need and.
We are in the process of putting together for next year and next time, we talk about next quarter, we'll have a pretty good perspective for.
Hi, Thank God, you be kind of people organic rate investment and capital expenditures of course, that's going to be driven by what the budget process yields.
The next one Brazil.
All right. Thanks.
Thanks Brandon.
Thank you. Our next question comes on the line that Michael Cherny from Bank of America. Your question. Please.
Great. Thanks, so much for taking the question.
I wanted to dive back a little bit if since the overall consumables franchise I know there's been some comp affects you mentioned some of the Venlo dynamics that being said you had talked about the promotional changes last quarter I guess aside from the one D.S. program was there anything else that either had hit choose last quarter about got better than you had expected it my understanding.
It is that some of the promotional changes would take a little bit longer to wind out than you would've thought and then obviously with one DS the sign ups being great DS World just curious to get an understanding of timing and somebody other factors that may have drove to that outperformance on consumables.
Yeah, Michael Thanks for the question.
You know look.
Yes, consumer we did better in consumables this quarter.
Then we thought and obviously, there's the venlo noise that goes through this which you identified I would just tell you you know I still think we're a quarter or two away from understanding exactly what the promotional impact change is going to be.
And look we're happy with the third quarter our guidance, obviously reflects what we think we're gonna do in the fourth but.
It's going to take US a couple of quarters. Because this is a you know we've been pursuing one kind of promotional programming.
For 25 years and we're in the process of changing that the but I would tell you. The one the profound changes in the U.S. you know in addition to finally, giving the Salesforce the news it needs with really good clinical innovation you know we went through a pretty significant salesforce effectiveness program and we introduced.
You know this new concept the clinical develop it managers a common CRM platform and now we've introduced the loyalty program and you know the loyalty program. The response has been really strong you know.
To be honest, we've we've exceeded what we expected in terms of number of sign ups. It's exceeded what we thought in terms of.
The impact on the customer behavior.
Since leaving D.S., who I mean, we can obviously see exactly what they're doing and we're very very encouraged but the fact that our dealer partners have really jumped on this as a way of expanding demand. We continue to think we're going to sign things up do I think it's going to be immediate shot the arm in the fourth quarter, probably hard to measure, but you know again I think we.
Let's turn to say you know, we're trying to do the right things for the consumable business to provide that 2% to 3% growth that we indicated in our long term, which is innovation clinical education, and improving our demand and our demand creation activities, whether it's things like one D.S. Our sales force effect. This program. We feel is going to is going to get us.
To where we need to be in consumables and you know look odd.
Again, we're trying to be as transparent as we can you know those things are going to be a little bumpy.
And this this was a positive bump but.
Look I'll tell Ya.
If you're sitting in my chair and you look at the portfolio of products. We have we recognize absolutely how important having consumables grow is and we're committed to you know the program that we need to see that is as something that we are driving consistent growth.
On a sustainable basis over time.
And maybe just to dive a little bit further into one of the comment you made regarding the interaction with the dealer partners. So you have here.
As you think about the pathway forward for growing some of these.
Direct lead some of this car CRM management. Some of these loyalty programs. What are you, hoping that your dealers do differently to change their strategy their performance their responsibilities with you and I guess along those same lines will at some point get to an area, where the customers essentially deciding do I placed that order.
Through the deal ever if I placed an order.
Directly through the promotional strategy I guess, how does that play off overtime.
Yes, Thanks, Michael So we get asked this question indirectly in the number different ways here is kind of how we view. This first you know our dealer partners have been terrific about one DS. They look at at the same way, we do as a great way to accelerate trial of our critical innovations and you know it and it also has a one.
Interfyl opportunity to tie in equipment and consumables in the unique way and you know as a result, you know we're all interested in selling more so thats been terrific. You know in terms of let's let's remember we have a direct and we have an indirect part of our business you know our ortho implants endo businesses, our direct businesses, which we.
We've always had direct relationships with the Dennis on the consumable side prevention lab.
And though excuse me prevention.
Lab and.
Those businesses, our traditional consumable businesses and we're going to continue running through the deal I mean it. They provide we've said this a number times really great service in terms of you know they help do demand creation. They run in order to cash you know they manage it extremely complex logistic business.
And there are terrific partners. So you know our aim and how we look at things is hey, we're we're supposed to come up with great innovation and we're supposed to help educate the Dennis clinically and we're supposed to create as much demand.
For our products as we can and we work with our dealers to help spur that demand further and they provide a incredibly important part of our value chain.
Perfect. Thanks, so much.
Thank you. Our next question comes in the line of Elizabeth Anderson from Evercore. Your question. Please.
Hi, good morning, guys.
Think about moving into.
The second phase so to speak or 2020 in terms of cost cutting are you seeing sort of the opportunity set their changes it sort of as you expected.
Any commentary quantitative, but I'm looking qualitatively across the.
Expansion business.
Good morning. This is Jorge Yeah, we we have made I would say during the first phase of the restructuring from it cost they called perspective, we've made significant.
Progress and as I indicated that we're going to achieve approximately $85 million this year.
We have we're following a an extremely detail and rigorous process to identify opportunities to put initiatives in place and to track those and we have a very healthy pipeline of projects and opportunities that have been already identified and of that.
To your point will require more more work and a little bit of more sophisticated capital planning and restructuring of the business, we put in place our pillar structure.
A few months ago, we are trying to have horizontal up processes across the corporation and now we are seeing the up early benefits from that so one example of a key area for US that is is yielding benefits now, but up is going up probably provide a lot more benefits into future based on.
The work, we're doing now is global supply chain.
That is up one massive part of our business that is now being handle a anymore global way and now and that's going to yield sumit significant benefits in the future. Similarly for all or end to end processes across the company order to cash.
Corporate infrastructure.
Those those are changes that require more time, but we have identified already where the opportunities lie and we're going after those and.
All of those things combined.
Will yield the incremental headwind 20 million or so to get to the 220 to 25 target for the year. So there's a lot of a lot of work to do buy one thing that was actually.
A very nice surprise for me when I when I came aboard a few months ago was to see how structure and disciplined that process is and and so that gives me a lot of confidence that we are going to be able to overtime and did during that time period. During the period that we have indicated to achieve.
Those those savings.
There is.
Things around portfolio shaping that stopped we have already accomplished but there's probably some or things that we can do there. So there was a healthy pipeline of opportunities and they havent identified.
We are in the process of launching a lot of them.
Okay perfect. That's very helpful and as you think about your improve and as you pointed out the operating cash flow into free cash flow going forward does that change how you think about capital deployment going forward.
I don't think show I think it in terms of how we deploy our capital I think the general principles that I indicated in my prepared remarks will remain.
I think the good news is so we should be able to in the future we should be able to generate more cash flow to reinvest more in the business and to.
Deploy capital in a balanced way.
So I don't think generating more cash is going to substantially <unk> materially change, how we think about capital allocation I think the good news is there there will be.
If we if we implement if we execute on the projects that we haven't mine from a capital efficiency perspective.
There will be more more more cash available to reinvest into business and to return to shareholders.
Perfect that's very helpful. Thanks.
Thanks Elizabeth.
Your next question comes from the line of John Kreger from William Blair. Your question. Please.
Hi, This is corneal ends on for John This morning.
The one consumables question Oh, we've seen from other industry participants that have reported this quarter a disparity between consumables performance on a regional basis and I think that you guys pointed to that to you in your prepared remarks, and but we do recognize that I guess you guys had a benefit from the disruption in Europe last year, but I definitely you're thinking about kind of like to end markets.
What would you say that different dynamics are that are driving that bearing performance in each of the markets as it relates to consume both thanks.
Yes, Thanks, Courtney I I would tell you you know.
A lot of the consumable conversation invariably winds up boiling down to what's going on into the U.S. retail market. We always want to step back we do a tremendous business globally and if you look at what we would consider our growth areas and we've highlighted the importance of the developing world for us.
We're seeing good growth there I mean, you know if you look at the rest of world growth rate you know on an internal basis was 10% this quarter and then some of that was prime but some of that's the consumable side. So you know we tend to look at.
Right now Europe , and the U.S. or are kind of.
One, 1% plus growers and the rest of the world is whether that's.
Latin America, whether that's middle East whether that's.
Asia Pac is growing significantly faster than that.
So on an end.
End market basis, we continued to be comfortable that the consumable businesses, you know again on a quarter to quarter basis, there might be some variation, but we continue to believe feel that's a 2% or.
Over time on a global basis, 2% to 3% as kind of what we target that.
When we think about our strategic planning horizon, that's how we think about the business.
Great. Thank you.
Thank you aren't next question comes on line of Jon Block from Stifel. Your question. Please.
Hi, This is Trevor on for John Thanks for the question sign a first one on CAD Cam can you talk that ultimate conversions of past upgrade cycles as such as blue in omni in kind of comparatively what are your initial thoughts about omni to prime so far.
It's it's interesting so.
You know obviously, when we come out with a once like this we go back to Blue We go back to on the and I would tell you right now there's two things that are different with prime that we're you know makes us pretty optimistic I mean, the first is.
We we went out the gate and we were really focusing on new users how do we sell more people on chair side, and you know really help them transform their practice and help their patients out and we we at this point, we feel obviously blue was a little bit earlier in the cycle, but we feel in terms of attracting new users.
Prime has been a benefit to us versus what we might have seen in past launches part one part to where are we in the cycle.
You know we did not do an upgrade as early on this cycle as we did in other cycle some of that.
And I realize.
You know memory, sometimes get short, but one of the things we had actually done we had worked hard to accelerate the prime scam launch from one it was originally planned and as a result.
We have been really pushing you know our supply chain team and Ben time, and Dan key or global supply chain.
Leaders has been really all over this is you know.
We took a little bit of a risk accelerating the program. How many of these would we have and the team has been able to over deliver so.
We did not do a upgrade as early as we had in other launch cycles, particularly in omni.
And you know right now we've just done at the U.S.
Which is different than how we've we've done that in other time. So so far prime is outperforming what we saw with omni.
As much as we can look back and see that eight years ago.
Great. Thanks, and then maybe on regulatory Tom and the rest of the World how is our approvals looking for prime scan.
And what else needs to get done at this point.
Prime skin, we feel pretty good about it we mentioned that in her prepared remarks, we were able to run it out into Korea, Japan.
Japan and basically right now we're.
Either approved or about to get approved in most major areas. You know there China is one that we still haven't gotten approval for that is going to take us a little while theres a couple isolated.
Countries, but by the beginning of the you know I would say September time period were we were had approval in most of you know if you think about our top 20 markets.
You know, there's one or two exceptions, but we're been pretty much approved a around the world.
Now you know stuff like you know John when we when we launch.
You know, Sarah 5.1 with or check.
The devices approves, sometimes the software might take a second or too longer so, but basically prime scan. The prime scan acquisition unit camera have now been approved in most places.
Great. Thanks, so much.
Thank you. Our next question comes from the line if Steve Felica from Barclays. Your question. Please.
Hi, This is shopping and on for Steve I'm, just going back to prime scan.
All that there were some bottlenecks that you had in the manufacturing prime scan on its essentially cleared at this point given the outperformance in the quarter and I guess in terms of pipeline that you've seen in the quarter thus far.
Seeing more coming from new users in the quarter or is it more related to be a great program. Thanks.
Yeah, Thanks, Jonathan I'll take this one.
No.
Again, we've been very very happy with demand for prime scan and the reaction we saw at DS World was quite frankly better than we thought.
So what that means is right now we're selling you know we're delivering every unit of prime skin that we could make.
If we might have out stripped.
Our manufacturing capacity right now, but it's all that means is it's a week or two delay in getting the product, we do expect that to catch up.
No sometime in the first quarter, but.
You know again the reaction to prime has been been really really gratifying and you know again I can't thank the team and Ben time, and our global supply chain leaders enough because there.
They got us more product earlier than we thought and and you know in the third quarter. They over delivered we're optimistic that they will catch up to complete demand by the first quarter, but you know.
It doesn't mean that we're missing opportunities. It just means Dennis who were excited about this product may get it a little bit later than they thought.
Okay, great. Thanks.
Thank you. Our next question comes on line of you Chen from H.C. Wainwright. Your question. Please.
Hi, this is on.
<unk>.
Thank you for taking my questions.
Just a simple question on data her.
So now than this.
What I can see if you had any comments about.
To that market dynamics changed in any way for them for bullets or whatnot.
That's my support Serrano does that affect the company's instruction for pool.
No you know and Vista is out there you know they banter around for a while they were just a division of Danahers you know the fact that their public doesn't change their competitive profile you know we.
We think they're good competitors and a beer in the team has done a great job, but they've been around you know it's a it's a fact of our competitive landscape and has been for.
Forever.
So thanks.
Thank you Frank.
Before.
Thank you. Our next question comes on line of Jason Rodgers from Great Lakes Review your question. Please.
Oh, yes, I'm just looking over some of the details of the DS program, It looks like Dennis who sign up.
And we'll get a greater discount on consumables, if they purchase before year end as well as become eligible for rebates and other discounts or the next two years.
Do you think sign ups and purchases before year end to get that higher discount will be significant enough to boost the consumable growth in the fourth quarter and potentially pull forward demand from the first and second quarters. It next year.
First thank you for the question.
We tried to be consistent saying consumables is gonna be up and down and you know I overtime.
Putting programs in place the innovation and everything else to drive consistent growth the one DS program.
We think is going to have a positive impact on the on the fourth quarter on the be honest, we think it's going to have a positive impact on the first and second quarter, because it's not as if.
No there's not incentives for them to keep buying if you actually peel. The one DS program. There is there's clearly a opportunity to get a discount based on their 2019 behavior at purchasing behavior, but there's also a pretty significant rebate.
That comes into 2020, so we were looking to create sustainable relationships with these dennis and not create a promotional spike.
Okay. Thank you.
Thank you. Our next question comes on line of and right from Credit Suisse. Your question. Please.
Great. Thanks, Okay I'll hop on late but can you give us an update on the broader Dsos strategy and then also within PSS strategy kind of prime scanning TPS Harrington and how that relationship is evolving kind of with the innovation pipeline that you have as well thanks.
Yes, Thanks Aaron.
You know look we think the dsos are important space for us we're getting a very positive reaction and if you think about dsos and kind of groups. You know you've you've got kind of the really large national obviously, we have strong relationships with some of them.
On total equipment and we're forever looking to expand that we really believe that we are in sync with what the Dsos are doing if you. If you really break down what the biggest single cost of an Aspen heartland or Pacific.
Is it it's the their dentists.
How much time does how product how productive are the Dennis and if you look at stuff like Prime scan, which works.
Really quickly I mean, you can do a full arch and under a minute and if you look at how you know the software. We put was CEREC you know the reaction we're getting from is pretty positive. While this saves time I can get my dentists to do more procedure. So we feel.
If you look at what we're doing with like short fill one you know again, it's a forced step process versus an eight to 13 step process. So we feel the the dsos are significant opportunity for us we're spending a lot of time with them. We really look at that as a key customer group for us and the reaction of Prime has been pretty good we want the reaction to.
Our orthophos to be pretty good as well. So you know again were.
Our dsos strategies evolved in the last two years I mean, we now from a sales perspective, we have a dedicated d. So group you know, we're we're spending a lot of time. There. So you know long term we're optimistic that.
This is it's going to be it an area that we can continue growing and partnering with them to deliver better patient outcomes and and better productivity for their own Dennis.
Okay, great. Thank you.
Thanks Aaron.
Thank you. This does conclude the question answer session of today's program I would like they had the program back to Mr., John Sweeney for any further remarks.
Thank you very much everybody for joining us today in her third quarter earnings call. We look forward to see many you at the Greater New York death to show later in the quarter. Thank you very much and have a good day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect. Good <expletive> .