DENTSPLY SIRONA Inc. (XRAY) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the DENTSPLY SIRONA Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today's conference is being recorded. [Operator Instructions] I would now hand the conference over to your speaker today, John Sweeney.

Thank you, operator, and good morning, everyone. Welcome to our second quarter 2020 earnings conference call. I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we make certain predictive statements that reflect our current views about the future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of those most important risk factors that could cause actual results to differ from our predictions. And with that, I'd now like to turn the program over to Don Casey, Chief Executive Officer, DENTSPLY SIRONA.

Thank you, John, and thank all of you for joining us today. We hope that you and your families remain safe and healthy. To start the call, I would like to acknowledge two groups that deserve both our gratitude and recognition. The first is our customers. Throughout this pandemic, dentists and their staff have shown tremendous resilience, whether dealing with changing local regulations, adjusting to new safety protocols or finding new ways to help patients, dentists all over the world have adopted and innovated. Their commitment to their patients is inspiring. The second group is the employees of DENTSPLY SIRONA. Over the last six months, they have been challenged in truly unprecedented ways. Throughout, they remain focused on serving our customers, creatively addressing new circumstances and continuing to make progress on our critical initiatives. This highlights that the people of DENTSPLY SIRONA and the culture we are building are truly our most important assets. I would like to thank all of them around the world for their extraordinary efforts. It is a privilege to lead such a committed and passionate group. Our call today will focus on four key areas: the first is to outline our second quarter results, the second is to provide some details on how our business has been performing as dentist offices reopen, the third area provides the steps that DENTSPLY SIRONA is taking to position the company for the future, and finally, I will review the company's near-term priorities as we navigate the current environment. As expected, our second quarter results reflect the major changes in the market. The quarter began with significant governmental actions, resulting in the shutdown of dental practices and restrictions on patient traffic. The situation improved across the quarter with month-to-month improvements in terms of dentist offices opening and patients beginning to come back. Our revenue followed this trend. Our team continues to track patient attitudes around returning to the dental office as well as the ongoing impact of additional infection control requirements on office capacity. Based on what we are seeing, we are optimistic that the recovery is well underway globally. Our results in the quarter also reflect significant actions the company took to address the difficult operating environment. These plans were built around employee safety, meeting the needs of the customer, enhancing the financial strength of the company and making continued progress on our key strategic initiatives. To-date, we have seen good results around employee safety and have not seen any major disruptions across the organization. Despite challenges presented by the pandemic, the company has been able to reliably meet customer demand. Our commercial team showed excellent creativity in adapting to new circumstances, providing an extensive array of digital, clinical education and online marketing events. These programs have been extremely well received. A comprehensive cost control program was executed during the second quarter, involving furloughs, short-work weeks, salary reductions and spending controls. These efforts contributed to the drop in SG&A expenses in the quarter. While the business has begun to restart, this program will remain in place until the trajectory of the recovery is better understood. Our supply chain has been disciplined around inventory, and there has been a real emphasis on protecting our cash flow. Finally, the company undertook a series of actions to bolster its liquidity and financial position. While there is a pressing need to manage the disruptions caused by the pandemic, our team is focused on positioning the company for the future. Since announcing a restructuring in late 2018, DENTSPLY SIRONA has made significant progress against the goals we had laid out. Our work on continuously challenging ourselves has shown there is still further opportunities to improve our performance. Therefore, today, we are announcing additional portfolio actions that expand on the original program. These include plans for exiting the traditional orthodontics business as well as parts of our analog lab business. I will discuss details later in the call. These steps, while difficult, allow the company to focus on higher growth and higher-margin digital areas where we believe DENTSPLY SIRONA has strategic advantage. Moving to Slide 7, where we summarize our 2Q 2020 results. Second quarter revenues were $491 million, down 50% on an organic basis due to the impact of the coronavirus. Adjusted operating income was negative. Non-GAAP EPS for the quarter was a loss of $0.18. Cash flow was actively managed in the second quarter, driving cash flow from operations of $175 million, which was up 21% compared to prior year. I will now turn the call over to Jorge, who will review the quarterly results and provide an outlook.

Thank you, Don, and good morning, everyone. The second quarter was obviously a challenging one for the global economy and for many industries, including dental. On Slide 9, we show our second quarter non-GAAP 2020 P&L. Starting with the top line. Organic sales were down 50% as compared to the prior year. In the U.S. and Europe, with some minor exceptions, dental practices limited their activity to emergency procedures in April and much of May and then began to reopen as we moved into June. As we shared on our last earnings call, we saw declines of 60% to 80% in April in certain geographies, with the U.S. been hit the hardest, but our revenue trends improved gradually each month, finishing down about 40% compared to prior year in June. We also saw a gradual improvement from the first to the last week in June. So it is clear that we're seeing a recovery, but have yet to get back to a normal level of sales. Gross profit was $207 million or 42.1% of sales, down from 57.7% in the prior year quarter. As it is the case in solid and material reductions in volume, gross profit margin is impacted by the fixed cost base, which is difficult to address in the short-term. Examples of this cost include depreciation, leases, maintenance of manufacturing and logistic facilities and costs related to ensuring compliance with high manufacturing standards. Gross profit margin was also impacted by higher-than-average inventory reserve expenses of approximately $17 million, primarily as a result of lower sales. SG&A of $249 million was down a substantial $132 million, which is approximately 35% lower as compared to prior year. During the quarter, we took decisive action to reduce our SG&A costs, resulting in the steep year-over-year decline. One area in SG&A that actually increased over last year was bad debt expense, which saw an uptick of $15 million year-over-year. These significant P&L fluctuations were driven by the ongoing market disruptions and generated an operating loss of $42 million in the quarter. Last year, our operating profit was $202 million in the second quarter. Interest and other increased by $9.9 million versus last year, driven by the issuance of $750 million in long-term debt, the addition of new credit facilities and the termination of certain FX hedges. The non-GAAP tax rate was 27.5% in the quarter, up from 25.3% in the prior year, a function of the change in the estimated amount of pretax income and a change to the expected income mix. Non-GAAP EPS was a loss of $0.18 as compared to non-GAAP EPS of $0.66 in the prior year quarter. Moving on to Slide 10, where we review our Consumables segment performance. Reported sales were $187 million, down 58.6% and down 57.7% on an organic sales basis. All of our product groups and consumables were negatively impacted by the temporary closure of dental offices. While our Consumable sales show a steeper decline than our T&E sales, both segments actually performed relatively similar from an end customer perspective. Let me explain the two factors that contributed to the larger decline in our Consumable sales. First, there's a difference in order lead times. Consumable deliveries tend to match demand almost simultaneously, up or down. Due to the nature of the products, T&E has a longer order lead time, and therefore, deliveries continued over an extended period even after dental procedure volume has slowed down at the beginning of the quarter. The second factor impacting Consumables more than T&E is the fluctuations in inventory levels in the biller network. During severe market conditions, it is typical for companies to preserve cash by lowering inventory balances as much as possible. We saw a steeper decline in Consumables network inventory. So when you account for all of these variables, we believe both segments declined at relatively similar levels. Consumables operating margin was negative 9.4% as compared to 27% in the second quarter of 2019. There are two primary reasons for the decline in Consumables margins. The first reason is that the Consumables segment experienced a steeper fall off in sales compared to T&E. Second, the Consumables business is more plant and infrastructure dependent and requires more volume to run efficiently. We have more manufacturing plants dedicated to Consumables. And this means a higher fixed infrastructure cost for this segment. This is why we have been taking steps to consolidate our footprint and reduce our fixed cost base. In the past couple of years, we have completed several portfolio shaping actions, including FONA, 1-800-DENTIST, SICAT and the Surgical business of Wellspect. In addition, the two portfolio shaping activities we are announcing today will further consolidate our manufacturing footprint and will increase productivity and decrease fixed costs. Moving on to Slide 11, where we highlight our Technologies and Equipment segment. Net sales were $304 million, down 45.6% as compared to prior year. Organic sales for the quarter were down 43.6% versus the prior year. Equipment and instruments, digital dentistry and implants all experienced similar levels of decline in the quarter, driven by the lower sales resulting from COVID-19. Our Healthcare business saw a slight decline in Q2 after posting strong Q1 as Healthcare systems were getting ready for the first major waves of COVID-19. Technologies and Equipment operating income margin was negative 1.3% versus 17.2% in the prior year quarter. On Slide 12, we show our business performance for the second quarter on a regional basis. U.S. sales of $131 million declined 60.3% compared to the prior year. This represents a decline in organic sales of 60%. In the U.S. market, Consumables declined slightly more than T&E. European sales were $215 million, down 49% compared to the prior year. Organic sales were down 46.9% versus last year. In Europe, Consumable sales declined more than Technologies and Equipment on a percentage basis. Rest of the World sales were $144 million, down 44%, and organic sales were down 41.9%. Rest of the World Consumables declined more than T&E sales in the same – in the second quarter. On Slide 13, we show our cash flow performance. In the second quarter of 2020, cash flow from operations was $175 million as compared to $145 million in the prior year quarter. This strong cash flow generation was the result of a disciplined approach to curtailing expenses and reducing working capital without sacrificing key strategic investments. Working capital generated a significant boost in liquidity in the quarter. We were successful in achieving meaningful reductions in accounts receivables and inventory balances. We expect some of this cash will be injected back into working capital as demand and production volumes climb back up to normal levels. In terms of capital expenditures, we spent $13 million in the second quarter of 2020, down from $27 million last year. Free cash flow was a strong $162 million in the quarter, up 37% as compared to $118 million in the prior year. In the quarter, we paid $22 million in dividends for a total of $184 million returned to shareholders through dividends and share repurchases in the first six months of 2020. At the end of June 2020, we had a strong liquidity available, comprising $1.1 billion of cash and $1.2 billion of committed credit facilities. The efforts we made during the second quarter ensure that we have ample liquidity available to invest and grow the company as the economy recovers. On Slide 14, I'd like to talk about the significant actions we took to reduce operating expenses in the second quarter of 2020. Our efforts to reduce costs in the quarter were multi-faceted. All levels and functions of the enterprise contributed to significant compensation savings. Each part of the organization up to and including the Board of Directors and executive levels have stepped up and helped in these efforts. As of today, most of our employees who were impacted by these measures have returned to work or to normal pay levels. The next largest area for cost reductions was discretionary commercial spend such as advertising and promotions. It was logical to reduce this spend when dental offices were closed, and the returns could not be realized. We also achieved significant savings from reductions in professional services and, of course, travel expenses. Together, all of these actions delivered a reduction in SG&A of 35% versus last year. With respect to business trends for the remainder of the year, I'd like to make a few comments. First, let me start with current volume trends. All regions recovered from their low point in April and improved by 20 to 40 percentage points by the end of the quarter. Additionally, in June, the last week of the month was significantly better than the first week. And we are pleased to note that the positive momentum continues into July, with July sales approaching or surpassing 2019 levels, depending on the region and product groups. There are still some gating factors in place, including the availability of personal protection equipment, new infection prevention protocols reducing office capacity and overlapping regulations, all of which impact the shape of the recovery. Together, these factors point to a gradual as opposed to a sudden snapback in demand. Let me give you more details from a geographical perspective. In the U.S., virtually all dental offices are now open, and we continue to see signs of improvement, with July volume trending better than what we saw in June. In Europe, we also saw July trends improving sequentially. With regards to the Rest of the World, in APAC, some of the markets turned positive in July, with good traction in China and Japan and some lingering concerns in Australia. Latin America remains a challenging market as COVID-19 continues to impact our business in Brazil and other countries in the region. Moving forward to the second half of the year. As we announced today, we are accelerating actions to fund growth areas and improve efficiencies. As we did in Q2, we will continue to drive a disciplined resource allocation process that emphasize return on investment and sustainability of our growth initiatives. With that, I will now turn the call back to Don.

Thanks, Jorge. And moving to Slide 17. As I mentioned earlier in the call, in November 2018, we put a plan in place to accelerate growth, improve margins and simplify the organization. Our results through 2019 and the first quarter of 2020 show significant progress. The execution highlights of our plan include: accelerating growth behind new products, including Primescan and Primemill as well as other new products in our Consumable portfolio. The pipeline of future new products has also been enhanced. The company has made major investments in critical areas like our digital product portfolios, digital commercial capabilities and growth priorities like our SureSmile clear aligner business. DENTSPLY SIRONA has implemented a new organizational structure, centralizing supply chain and other functions, while creating a unified commercial structure. There have been major initiatives designed to transform the finance, HR and IT areas. Further, we've undertaken multiple portfolio-shaping activities, including the ones announced today. The restructuring plan is a multiyear initiative. As part of that, the organization has embraced the need to continue challenging ourselves to go beyond the original plan and deliver better results. That work has shown there are significant opportunities in both the near term and longer term. Moving now to Slide 18. Over the last several quarters, as Jorge mentioned, we have exited several underperforming businesses. These reduce our cost and complexity, while serving to enhance our growth and margins. The team continually reviews all our business against the framework around future growth opportunities as well as strategic fit. In the area of orthodontics, we believe that the clear aligner space is an attractive opportunity for DENTSPLY SIRONA. SureSmile now offers a comprehensive digital treatment plan that positions the company well in this rapidly growing market. Going forward, we will focus all our efforts in the ortho space on the clear aligner area. We believe this offers the opportunity to grow, innovate and take advantage of many of DENTSPLY SIRONA's unique strategic advantages, including our large CEREC user community. As a result, we are exiting the traditional orthodontics business, which includes brackets, bands, tubes and wires. The traditional orthodontic business is a component of the Technology and Equipment segment and had net sales of approximately $132 million in 2019. Likewise, in our lab business, there is a clear opportunity to focus on the digital space, which is showing good growth rates and solid margins. It's a place where innovation will be rewarded. Based on our analysis, it is critical to focus all our lab resources in the digital area going forward. As such, we are announcing plans to exit the analog portion of the laboratory business that manufacture removable dentures and related products. This business is a component of the Consumables segment and had net sales of approximately $44 million in 2019. Together, the portfolio-shaping initiatives and additional actions are expected to result in the closure of several facilities and an incremental reduction of approximately 6% to 7% of the company's workforce by the end of 2021. The ongoing execution of the restructuring will enhance DENTSPLY SIRONA's continued efforts to grow revenues, expand our margins and simplify the organization. Slide 19 lists our priorities for the back half of 2020. They include executing on our comprehensive restructuring plan, pursuing our growth initiatives aggressively and meeting our financial objectives. In conclusion, the COVID pandemic will continue to impact our industry and our company for the foreseeable future. Current trends are positive and a reason for optimism, but we will need to continue to adapt to the circumstances as they change. We believe we have a comprehensive plan for both the short term and longer term to deliver value for our customers and our shareholders. Further, the company has maintained its focus on our priorities around growth, margin expansion and simplifying the business. Our financial strength, broad portfolio and global reach are – position us well to succeed and win in the dental industry. It's hard to know what the new normal is or when it will arrive, but our internal theme is that teeth do not heal themselves. Our team is optimistic about the fundamentals of the industry, and we embrace the current challenges and are confident in our strategy, our customers and our team. Thank you. And with that, we'll take questions.

Thank you. [Operator Instructions] Our first question is from Jeff Johnson with Baird. Please go ahead.

Thank you. Good morning, guys. Can you hear me okay? I think I was on mute there.

Yes. We got you, Jeff. Yes.

Great. Good morning. So Don, I think I just want to start with the July comments. I really want to understand maybe message that you want to have out there. It sounds like you could make the argument that July was getting back towards flattish year-over-year levels according to what Jorge said. But how much of that might be sell-in that was recovering off some sell-in issues earlier in the quarter or earlier in 2Q? Does your sell-in is it starting to match kind of the sell-out at this point? And again, I know you're not guiding, but for 3Q, should we think July maybe isn't sustainable as you get into August and September, if there is some backlog helping in that July number? Thanks.

Yes. Thanks, Jeff. Look, I think Jorge said it clearly in the prepared remarks, as we're looking at July, there's places that have – we're seeing good progress. In some cases, it's actually exceeding 2019. Your specific question about how much of that is inventory rebuild, it's hard to see exactly. There's a couple of things we're looking at. And that's one of the reasons we're not being – okay, let's just go project July into August, September and later in the fourth quarter. The things we're looking at is patient volume, and we've seen that as good. Office capacity, we see office capacity kind of improving. Our patient tracking is telling us that confidence in the dentist office continues to go up. But there is a pocket that's going to be reluctant, at least in the U.S. to go back for a little while. And what that, in our mind, means that, okay, look, if we're getting capacity in the dentist office back to close to normal, that's going to take a little bit of time. I think we're working through a bolus of patients right now. And then I think from an inventory perspective, our dealers and the dentist office ultimately are working through the fact that when the pandemic started, I think people hit the brakes pretty hard on stuff that's ordered almost every day. And in our mind, that's kind of the consumables space. And you could see, Jeff, the difference between our Consumable and the T&E side, and we believe that is a lot to do with, okay, we don't know how long the office is going to be closed, we're going to stop building inventory on the daily stuff. And as a result, there may be some build back here. But look, in my summary, I was pretty clear on saying, hey, look, we – we're happy that we saw consecutive month-to-month sequential improvement in overall demand. We're seeing that at the retail level. We're happy that July has continued that trend, and we're happy to see that in some cases, we're actually tracking better than 2019.

Understood. That's helpful. And just as a follow-up, thinking about 2021 conceptually, we all know what the ADA is saying about high likelihood that dental consumption and dental industry-wide revenues are down relative to 2019 level. I don't think anybody would really argue with that, at least looking at things right now. But with some of the extra restructuring efforts you're taking now, some of the tailwinds from the restructuring that we're probably still continuing from the past plan, how do you think about margins, especially next year? Can they get back to 2019 levels with revenue that at least is approaching 2019 levels next year? Or is there a lag in kind of the margin recovery relative to how we think about revenues next year? Thanks.

Yes, Jeff, it's early for us to really forecast 2021. I would tell you the steps we took around the restructuring, though, reflect our interest in sitting there saying, hey, look, we need to get back on the margin progression. I mean, we've been saying since November 2018, how do we grow, how do we get our margins improving. And I think we have to take organizational steps to do it. I think the results here show you that we think we've made some good progress. I mean, basically, through the first quarter of 2020, we were tracking on a margin basis. And what we've seen, obviously, our margin is revenue dependent. And – look, if revenue is down 20% in 2021, that's obviously going to have an impact on the business. We don't think that's going to happen. But we are taking specific steps now to sit there and say, irregardless of whether the category is up 2% or 3% or down 2% or 3% or up 10%, down 10%, we want to be taking steps towards margin accretion. And as we get out of the traditional ortho business, we got out of the analog lab business, those are all part of the ongoing restructuring designed to help us really take charge of our ability to drive margin accretion going forward. And I'm not going to say it's going to be revenue independent, but we think we can take steps at a certain revenue base that we're really going to be able to drive margin. And we were very clear – I joke with John Sweeney occasionally that we picked our revenue targets to match the years just to make sure that we could always communicate it. So we've always said 22 in 2022. And internally, what we're trying to focus on is, look, we think 22 is attainable. We don't know if it's going to happen exactly on the trajectory based on what we're seeing with COVID. Is COVID and the knock-on effects of that, is that a six-month issue, is it a nine month, 12-month issue, but we want to be marching back towards that target. It just may take us a little bit longer to get there.

Thank you.

Thank you. And our next question comes from Tycho Peterson with JPMorgan. Please go ahead.

Hey, are you able to talk about how much of the Consumable pressure in the quarter was inventory destocking versus slower orders? And how much incremental risk is there going forward with distributors around potential additional destocking?

Good morning, Tycho. This is Jorge. It's hard to give any precise number. But as Don just indicated, in the case of Consumables, there is a – the order lead time is very short. And so when the pandemic hit customers and dealers, and in general, in the marketplace, there was a reaction to manage inventories very, very closely. And when we look at the data of retail sales and our sales up, there are a lot of indications that show that there was a reduction in the inventory levels that we historically or typically carry in the network. So there was an element of that. And when that comes back to the typical levels it is hard to project, some of that may be happening, as Don indicated. But I don't think that is something that for us is going to be meaningful from a long-term perspective. Listen, at the end of the day, we always want to make sure that our sales match retail sales. That is our key objective. That's how we make money. There will be always small fluctuations in the network. So I think given the magnitude of the changes that we experienced in the second quarter as a result of lower revenues and the uncertainty that we still have in many places, I think that is – that noise is not actually meaningful in terms of explaining our performance and our trajectory over the next several months.

Okay. And then, Don, on the portfolio reshaping, I'm curious, the decision to exit ortho. I always thought part of the picture on the clear aligner was the ability to go in and do hybrid cases and leverage that strong ortho channel as you push out SureSmile. So I'm curious if there is risk of dissynergies here? And how do you think about that?

Yes. Thanks, Tycho. We're actually – there's a component of the wire bending aspect of SureSmile that we're keeping. What – when we say how we kind of delineate traditional ortho, it's kind of the brackets bands that would go straight up on an orthodontist using orthodontia. We believe hybrid is meaningful. We believe that it's a differentiator for SureSmile. So we're actually keeping those components. So that piece of traditional ortho and the piece that actually came with the OraMetrix acquisition is going to stay with that. And then what we're seeing is where we're getting real traction. SureSmile tends to be right now focused around our CEREC base. We kind of made that shift basically in October of last year, and that's part of the One DS program, and we're seeing good traction there. So as we look going forward, we didn't feel that there were going to be dissynergies associated with getting out of traditional orthodontia treatment among the orthodontist group. So as we focus on growing in the future, we tend to think, all right, how do we take care of – how do we take advantage of our digital assets and how do we really look at expanding in places that are not necessarily tied to kind of the traditional orthodontia model.

Okay. And then just lastly, any thoughts on just the capital equipment appetite as we think about the back half of the year and then think about Primescan and Primemill? Can you just talk on to what degree you think there could be pent-up demand? And any need on your part to be a little bit more flexible in terms of financing or pricing potentially?

It's been interesting, Tycho. Even before the pandemic hit, we were really beginning to shift to one – our theory of One Visit Dentistry. And with Primemill and the speed of Primemill, it really made that a reality. I mean you can get patients in and out with a single unit crown in an hour plus. So we had made that shift. And it was interesting – in April, when everything went down, we really shifted to a bunch of digital whether it was product demonstrations or kind of taking people through what One Visit Dentistry really means. We got a pretty good reception. So what we've seen to date, and you've actually seen the results that there's a pretty good appetite in our mind for Technology and Equipment. Now whether it's spread across? Are we going to see treatment centers? And are we going to see imaging? Not sure. But we feel very good about Primescan and Primemill and the opportunity for dentists who are basically going to be dealing with a patient population that may be a little bit, hey, do I want to go to the dentist 3x in – during the pandemic to get a crown fixed or can I get that done one time. You're also seeing a lot of dentists that we've been talking to and we've been seeing a fair amount of success with saying, hey, look, I got to change how I practice and they used the kind of the downtime during the pandemic to think through that. So we're – we feel good about where we are from a Technology and Equipment space in the back half. And in a large part, it's due to the, first, the new products we pushed out, but also the change in messaging and how we're pitching these products. So ultimately – and look, we're working with our dealer partners globally right now to make sure that we're helping dentists access this material. But we're – do I see a whole bunch of pricing pressure and crazy financing options coming on our Technology and Equipment? No.

Okay, thank you.

Thanks, Tycho.

Thank you. And our next question comes from Steven Valiquette with Barclays. Please go ahead.

Hey, thanks. Good morning, everybody. A couple of quick questions for you. First, your comment around July being a fairly flat year-over-year on a global basis is obviously pretty positive. I know you don't want to give any specific guidance, but just kind of eyeball on the street consensus estimates for the third quarter. They call of revenues to be down some 20% to 25% year-over-year. So I'm just wondering based on what you're seeing in July and barring any other major changes in the landscape, is that a number that seems like maybe that's too conservative on the revenue outlook as far as where consensus is? Just curious to get your thoughts around that.

Steve, good morning. Jorge here. Listen, it is early for us to be able to extrapolate from the July numbers. And as you can appreciate, there is a lot of different data points coming from different regions. And there are some markets that are doing much better in terms of the number of offices that are open, markets that are good from a volume perspective. We still have lingering concerns in places like Australia, parts of Latin America, and there are some spots in Europe that are also still challenging. So it is very hard to make a judgment with respect to those numbers. I think what we are – we're really encouraged by the fact that sequentially, the last three months have been moving in the right direction. But from a planning perspective, internally, we're trying to – we continue to work with scenario planning. We are preparing the company for a multiple set of outcomes in the next few months and quarters, I think it is a prudent thing to do. So hard to tell you if that number is right or not.

Okay. That's helpful. One other quick clarification question. On the exiting of the traditional orthodontics and parts of the analog lab business, are these businesses that could be monetized through asset sales? Or are these just full shutdowns? Maybe just give us a little more color on the decision tree on shutdown versus asset sale?

Yes, Steve. As we look at it right now, we're making the announcement to get it done. Obviously, we'll look to dispose the assets in a way that is most beneficial to the company. If there's some asset sales, we'll certainly look at it. If it's a full shutdown, we gave you guys the numbers based on the worst-case scenario. And obviously, we're going to work to improve that. But again, the process, because we mentioned in the prepared remarks, it's multiple plants in multiple locations. Obviously, you start with the Works Council and you go through a lot of different things. But the numbers we gave you represent the base case, and we're going to work hard to improve versus that. And there is the opportunity to do better than what we said.

Okay, all right. Appreciate the color. Thanks.

Thanks Steve.

Thank you. Our next question is from Michael Cherny with Bank of America. Please go ahead.

Good morning and thanks for the questions. I wanted to just dive back into the July commentary specifically. I apologize to keep harping on this, but I just want to make sure it's as clear as possible. Jorge, are you saying that what you have seen so far in July on a total dollar basis across the book is similar to 2019? And is there any way specifically to think about how that's factoring into the U.S., in particular, in terms of the quantity of dollar basis versus some of the other growth rates where there might be some countries that did not have any meaningful COVID spikes that could be growing clearly at a faster clip?

Yes. Michael, thanks for the question. We are still trying to digest all the July numbers. There's a lot of data to look at from a product perspective, from a geography perspective. As I indicated before, July, definitely trended better than June. So that is very good. But it is – it depends on the region. It depends on the geography and at this – and on the products. At this point, I can't give you a breakdown because there's some analytics that we still need to do. Overall, the total portfolio is getting closer to 2019 numbers. And in some instances, it did better than 2019. And that is definitely a substantial improvement versus June.

And then just one more question on aligners. How do you think about differentiation strategy that you're going to go forward with? I know a lot of it was tied historically to the integration you had with Omnicam with CEREC and everything. As you think about where you compete, every aligner seems to have its own specific angle and what makes it better, where do you think that SureSmile will shake out is what makes it better or the best or what XRAY can offer is differentiated than everyone else?

Yes. Thanks, Michael. I would say that it's our system. Look, between Omni and Primescan, we think we've got a pretty good installed base. We have a very loyal user group there that is looking to practice at the highest level of their license. So when we can add something that's integrated and seamless like SureSmile into the package. And particularly, when we came out with SureSmile 7.6, it's really seamlessly integrated into our base digital assets. It becomes really easy to use. And we feel with 7.6, we're now able to compete across the broad portfolio, get Class I, Class II, Class III. We think that our treatment planning software is second to none. I mean, we feel it's really, really competitive. And we're very comfortable with the clinical results we're seeing. And as we go into kind of our installed base, we feel very good about that right now. And look, every single day, we get better and better at beginning to think about DENTSPLY SIRONA, not as individual product companies where we're sitting and saying, hey, we're going to sell you an Omni, we're going to go sell you Prime. And then, oh, by the way, maybe next week, somebody will come in with Suresmile. No, it's really – we've begun to focus much more on how do we focus on the customer as one company and as part of that one company approach, stuff like DS One – One DS, excuse me, we really are going in and saying, hey, look, how do you think about using these digital assets to make life easier around doing orthodontics with clear aligners? How do you really think about implants differently? And again, we're working hard to actually bring this idea that we're the dental solutions company to reality.

Does that answer your question, sir?

Yes.

Michael, we lost you.

Still here, thanks for the color.

Thank you. And our next question is from Jason Bednar with Piper Sandler. Please go ahead.

Good morning. Thanks for taking the questions here. Don or Jorge, thanks for all the restructuring plan color. Wondering in the orthodontic business, I mean you've mentioned here a few times leveraging the CEREC installed base with clear aligners. I think this makes a ton of sense. But I mean, should we interpret your CEREC comments to be that you're going to be emphasizing SureSmile principally in that GP channel? Or do you have a strategy to continue to target the orthodontics channel that doesn't have that same CEREC owner base?

Yes. Look, we're happy to take SureSmile into the orthodontists office and the GP office. What we're seeing is, again, we want to play to our strengths, and we do have a large installed base. And when we do programs like One DS, we're obviously trying to package workflows together in such a way that we're – there's real benefit to the dentist, we're seeing more success there. So look, we will continue to pitch SureSmile across both the orthodontic as well as the GP channel. We think we've got more innate advantages in the GP channel right now.

That's helpful. Okay. And then I wanted to ask actually a new product question here, actually partially related to the prior question. So I appreciate its policy here not to discuss new products before they're officially launched. But instead of talking specifically to the recently approved large field of view imaging system are maybe any 3D printing plans you might have with Prime print. Maybe you could talk to what you see in the market from an opportunity or demand perspective for each of those categories, each of large field of view and also in Office 3D printing?

On wide field of view, we're filling a gap in our portfolio that it took us a little while to get there, but we feel very good about that right now. And if you look at what we've done with our Orthophos SL and our Align and now wide field of view, we feel that we're very competitive in the imaging space. And now in terms of where do we think about the macro demand for imaging equipment again, if you look over the last six months, and again, the pandemic really started at the end of the first quarter, and we've seen regions begin to recover. We've seen good solid demand across the board in Technology and Equipment. And it's when you start looking at things like wide field of view, it's really not necessarily about – I'm just replacing my x-ray machinery. It's what procedures do I want to do? And wide field of view, and particularly when you start looking at 2D and 3D kind of imaging products, it lets you do more procedures, it lets you do better implants, lets you do better endo, lets you do better orthodontist. So we think that demand is it going to gyrate a little bit as we recover from the pandemic? It could. But we've seen demand remain pretty solid on here. And in terms of printing, we haven't really discussed that. And look, our – one of the challenges in this space versus other med device spaces where you can really put your pipeline out, we tend to play things pretty close to the vest. What I would tell you is that our new product portfolio work has been one of – we kept saying in the prepared remarks, we stayed focused on our key strategic initiatives. Well, one of those is new products. And what we've been working on internally is how do we take the five to 10 most important products, whether that's in the Endo implant or in the Technology and Equipment space and keep making progress on it. And we're not backing off on what we think our launch schedule is on some of those major launches. And again, we think it positions us well as people come out of the pandemic.

All right, thanks very much, guys.

Thanks Jason.

Thank you. Our next question is from Elizabeth Anderson with Evercore. Please go ahead.

Hi, good morning, guys. I just was wondering if you could help us put numbers around the new ortho strategy? Can you talk about the – maybe some comments about how you saw volumes trend within orthodontics? And then also, if anything you can talk about in terms of the size of the revenue base and/or growth rates would be helpful, just in terms of framing that opportunity on a go-forward basis? Thank you.

Yes. Thanks, Elizabeth. We haven't broken out the total orthodontia business, and we don't give the clear liner number specifically. What I would tell you is that what we've seen over the last year is accelerating growth behind SureSmile. And we've seen actually very positive trends even coming out of the pandemic. So that's one of the reasons we feel very comfortable about that decision. Look, we feel that DENTSPLY SIRONA has an opportunity to become a solid number two in the space, and we're going to work towards that. So you can do some math around that. Look, ultimately, we've been pretty consistent in saying we want to grow, and we want to do margin accretion. So the steps we're taking around getting out of the traditional ortho business and really focusing on clear aligner helps us do that. So our bet and belief is that the clear aligner space is going to be a significant contributor to our aggregate growth rate over time.

Okay. Perfect. That's helpful. And then given, obviously, you guys have a pretty substantial liquidity position right now. How do you see that playing out if you sort of assume that, hopefully, we're through the worst of COVID and things continue to improve from here?

Yes. Listen, our capital deployment philosophies are not changing, have not changed. I think it was absolutely the right thing to raise more liquidity to be in a position of strength from a financial standpoint. We were encouraged actually by a number of shareholders to be in that position, which we totally agree with. At this point, we want to keep doing what we're doing, being very prudent with our balance sheet, being very diligent with our cash flow. You probably noticed in the second quarter, we had a very strong operating cash flow, very good free cash flow. And other parts of our deployment are not changing for now. We paid our dividend, and we have no plans to change the dividend at this time. Once things go back to a more normal level, we'll reassess where we are at that point. We will look at all of the demands for capital opportunities that we have at that time, and we'll make whatever decisions we think are in the best interest of our shareholders as we deploy that capital. But for now, I think the focus is on the recovery is how to ensure that we have a very stable financial position. How we are able to fund strategic initiatives, some of which Don has talked about that. We want to make sure that even in a low revenue environment and low profitability environment, we keep funding those initiatives. And that is one of the reasons we have that capital. We want to keep investing in the organic growth of the company for the time being.

Okay, thank you very much. That’s helpful.

Thanks Elizabeth.

Thank you. And our next question is from Steve Beuchaw with Wolfe Research. Please go ahead.

Hi, good morning. And thanks for the time here. I wanted to ask one very specific question and then one kind of big picture question. The specific one is actually about Germany. I wondered to what extent you'd willing to talk about growth in Germany, operating conditions there. And to what extent you think that's a good barometer for what the business might look like over the next several months in the event that we get the virus under control? And then I have a follow-up on strategy after that.

Thanks, Steve. Conditions in Germany are – if you were going to go around the world are pretty good. And again, I think Jorge said it well, it depends on the business and there's been different reactions to different businesses, and we kind of look at DACH together, which is Germany, Switzerland and Austria. But conditions there, if that's a harbinger of the future, I would tell you that things do get closer to normal. I mean, there's obviously – again, the same things we see over here that we keep tracking is what's office capacity around the new infection protocols. And again, that keeps getting better. Things are better in July than they were in June, just as the dentists and their staff get more used to that. And then patient attitudes. It's interesting, the patient tracking that we did in Germany showed that the – from a patient perspective, there was less change in Germany than there was in the U.S. around the pandemic. So there seems to be a little bit more of a stable attitude toward visiting the dentist office. So ultimately, if things look like Germany, it points to the fact that things do get back to normal.

Okay. Much appreciate it. And then Don, I wanted to borrow from your experience a little bit, if I could. You're a med tech guy. And you came into dental with a different perspective on what the industry could be and how businesses could run? And COVID has certainly changed some of that thinking. I wonder as you keep your med tech hat on and you think about what you want the business to look like and how practice evolves over the next, however, many quarters or months, and we get to the point where we're in a new post-COVID normal, how is your thinking – how has your thinking evolved in terms of what you want the business to be, what you think the practice looks like? I know you have a focus on digital that was there before. Can you just give us a sense for maybe what you might have learned in the last few months? And how your thinking has evolved on that future strategic vision?

Thanks, Steve. I think what COVID has done has brought into sharper focus what I think the industry is going to need to be and whether it gets there in two years, three years, five years. I think it's going to accelerate a couple of trends. I mean the first is that I think DSOs are going to pick up. I don't think it's going to happen in the immediate short term. But I think if you look at in Europe, in the U.S. and even in places in Asia-Pacific, where the pandemic exposed, sometimes some of the offices are kind of right on the margin and the dentists may feel it's better to practice in a larger group. So I think there – you may see a shift that way. I think the second big thing is the idea of when you say digital, I pushed digital pretty hard. In my mind, what I think, whether it's the DSOs or the individual dentists are going to be doing is they're really going to be evaluating their practice more critically. And I think COVID brought that into sharp focus that, hey, look, I've got 40 hours to see patients, how am I allocating time against procedures? And how am I thinking about what procedures can I do? And what procedures do I really want to develop within the practice? And I'm going to address that accordingly from the equipment and where I emphasize our training and whatnot. So I think what we've seen with clear aligners is something of that's going to go into the rest of dentistry. When you think about implants, when you think about even basic endo work, I think the increased digitization of diagnostics and how that can help dentist practice at the highest level of their license it's going to accelerate. So I would say, Steve, I don't think anything has dramatically changed strategically. What I think it's – and you read all the books and after major disruptions and dislocations, you tend to see new trends go. I think what might have taken a decade because dental tends to be a little bit slower than what we saw in med tech, I think it's going to accelerate pretty dramatically.

Couldn’t agree more. Thanks for all the help here.

All right, thanks Steve. Stay safe.

Thank you. And our next question is from John Kreger with William Blair. Please go ahead.

Hi, thanks very much. Don, curious, could you give us an update on the – your integration efforts? I'm sure COVID has impacted them a little bit, but you had a pretty long list across commercial manufacturing and R&D. Just kind of give us a sense about where that stands and to what degree the pandemic has kind of altered the thinking around them?

John, first, thanks for the question. When – I would say when we outlined things in November of 2018, we kind of said it was a three-year program. I would say that – and particularly with the announcements we made this morning around traditional ortho and analog lab, it kind of points to the fact that we're pushing a little bit faster, and we're pushing harder. I think the pandemic has accelerated our thinking. And look, when you see the revenue challenges in the second quarter, it also highlights some of the things that we need to get after even faster. So that's kind of what I would tell you. I – it's really interesting. Internally, we keep trying to tell people, hey, look, it's not as if we're going to get the restructuring done. And then that's it. We're not changing ever again. So I've been trying to condition the organization to understand that this is a marathon, and the restructuring might have been only the first 10K of that. So look, I would tell you, in terms of the plan we laid out, we're more than halfway done. But I would also tell you, it's great as I brought in a new team with people like Jorge, we've got a terrific supply chain leader. We've actually now got all the commercial people reporting into one person, Walter Petersohn. We're finding more and more stuff that we think that we can improve on that should have really deliver the promise of what DENTSPLY SIRONA should be. So look, specifically, hey, if you thought it was a three-year restructuring, we're slightly ahead of where we thought we would be. I would just tell you that we're committed – our management team is committed to – as soon as we get done that restructuring, we're not stopping. We're, how do we continuously improve.

That's great. Thanks. And then one last one. How is your implant portfolio performing, how it did in the second quarter? And are you rethinking that lineup at all?

Implants is – we've been happy with our implant business. I would tell you, when you say the second quarter, John, it's an interesting challenge in terms of what language do you use. Implants did well relative, but – versus prior year across the whole portfolio, was challenging. As we talk and think – rethink about our portfolio, look, we think we've started to actually get our new products where we need to get them. Obviously, we've talked about our immediate load Astra EV product. And I think that's the first of what you'll see a pretty regular set of introductions over the next 18 months in our implant space that are going to really let us be competitive. The other thing that we've been doing with implants that doesn't get a lot of highlight is we have a business MIS that we had bought a couple of years back, which lets us play a little bit more aggressively in the value segment. And as we've been rethinking how we approach our commercial go-to-market strategy across all of DENTSPLY SIRONA including on implants, being able to integrate that and expand that beyond the base of what they used to operate in when we bought them has been beneficial there. So we feel that implants remains a significant growth opportunity for us. I would say that we're starting to get the portfolio where we need to get it. I'm extremely excited about what I think the new products in that space are going to be able to deliver for us over the next couple of years.

Sounds good. Thank you.

Thank you. Our next question is from John Block with Stifel. Please go ahead.

Hi, This is Trevor on for John. Thanks for taking my questions. So I think you mentioned earlier that your patient tracking is saying that patient confidence has been continuing to go up recently. I'm wondering if there's any detail you can give there on just like how that's shaking out geographically? And if there's a read-through to potentially some of your July comments through that confidence level?

Yes. Sure. Thanks, Trevor. A couple of things. I mean, first, we're doing patient tracking across the entire globe. And again, we've seen consistent improvement around people likely to visit the dentist, and we measure it likely to visit in the next 30 days, the next quarter and whatnot. So we've been seeing consistent improvement across the board there. Interestingly, there's kind of a subgroup. People who have been to the dentist have had really positive experiences around how people – whether it's adjusting waiting room or how they're addressing infection protocols. So we see that group is pretty positive. One of the things we were trying to watch as they were kind of the flare-ups in the U.S. and in particular geographies, whether there was going to be a drop-off in patient confidence, we didn't see that. So look, and by the way, while most of the patient data is good, there is some reluctance on kind of a segment of the population to say, am I going to go back in the next month versus do I intend to go back to the dentist in the next six months. So there's a little bit of a lag there that we see, particularly in the U.S., but we don't see it elsewhere around the world. So patient tracking has been actually a good lead indicator. And again, we're seeing some good positive things there.

Got it. And then just one more on DSOs. We've been hearing that DSOs in larger practice groups are tending to perform better in this environment. I'm just wondering if that's what you've been seeing. And if you think that some of the smaller, more fragmented practitioners could start to play catch-up as well?

To be honest, Trevor, we haven't seen a huge differentiation between the DSOs and the individual practices. The thing that we love about this market is that whether – there's 600,000 dentists around the world and they're independent business owners. And they – a lot of them are very, very inventive and creative about how they go after and make sure that they're reaching out to their patients and whatnot. So look, do I think on the margin, if somebody was considering retiring in a year or two and COVID hit, do they sit there and say, now maybe the time that I accelerate that? Yes, you might see a little bit of that. But we haven't seen a sharp change in the number of dental practices that we're doing business with. And we think that we haven't seen a drop-off in the aggregate number of dental practices in key regions post COVID. So when we're watching – when we say things are 80% open, 90% open, 99%, we haven't seen the number of practices that we're measuring that against change.

Great, thank you so much.

Thanks Trevor.

Thank you. And with that, we conclude our Q&A session for today. I would like to turn the call back to John Sweeney for his final remarks.

Thank you very much, everybody. We look forward to updating you as we move through the rest of the year. Have a good day.

Thank you, ladies and gentlemen, for participating in today's program, and you may now disconnect, and have a great day.