DENTSPLY SIRONA Inc (XRAY) 2016 Q3 法說會逐字稿

Good day and welcome to this DENTSPLY SIRONA third-quarter 2016 earnings conference call.

(Operator Instructions)

Today's conference is being recorded. At this time, I'd like to turn the conference over to Joshua Zable, Corporate Communications and Investor Relations. You may begin, sir.

Thank you, and good morning, everyone. Welcome to our third-quarter 2016 conference call. I would like to remind you that an earnings slide deck presentation relating to this call is available on our website at www.DENTSPLYSIRONA.com.

Before we begin, please take a moment to read the forward-looking statement on slide 3 of our earnings slide presentation. During today's conference call, we'll make certain predictive statements that reflect our current views about our 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 our most important risk factors that could cause actual results to differ from our prediction. With that, I'll turn the program over to Jeffrey Slovin, Chief Executive Officer of DENTSPLY SIRONA.

Thanks, Josh. It is my pleasure to welcome all of you to our third-quarter conference call. Also joining us on the call today, Uli Michael, Executive Vice President and Chief Financial Officer; Chris Clark, our President and Chief Operating Officer for Technologies; and Derek Leckow, Vice President of Investor Relations.

This was our second full quarter together following the historic merger of DENTSPLY and SIRONA. As anticipated at the time, there are vast synergies on both the cost side and, more importantly, the revenue side. We have spent the last six months focused on bringing the cultures together and doing the required planning for enhancing our valued proposition to the customer. And also streamlining our cost structure.

We are now moving from planning to execution. This was evident at SIROWORLD in Orlando in August. There was a great interest in our end-to-end solutions and how we can enhance the customer experience clinical benefit.

I think it is fair to say SIROWORLD was a great success. As evidence of this, we had the record-setting rate of enrollment for our event next year in Las Vegas, indicating a very high interest in where we are going with DENTSPLY SIRONA.

Our teams are fully engaged in finding and capitalizing on the strength of bringing the world's largest dental consumable and technology platforms together. This is important as our merger is all about growth. At this stage, I am pleased with the progress I'm seeing, as we are beginning to execute on our plan.

On the cost side, we had some early successes. As we move forward, there will be more activity, including some sizeable opportunities in manufacturing, procurement, logistics and overhead.

This quarter, you have already seen significant tax savings that have occurred as a result of the formation of the new combined Company. We are on track as we progress deeper into the implementation phase.

Turning to our results. The third-quarter revenue came in a bit lower than we expected. Constant currency revenue growth was up slightly, driven by internal growth of 2.6% in rest of world, up against a very challenging comparison; last year, rest of world grew 15.6%. Europe was up 1.2% on an internal basis. Both our technologies and consumables segment grew. We grew in both northern and southern Europe.

Our US business was down 3.2%, with declines in both segments. Our technologies business grew double digits a year ago. We benefited from CEREC 30 and the launch of treatment centers. Although end users' demand for our technologies remain strong, we were unable to grow on top of the 18% growth in equipment last year.

In consumables, the combination of a soft summer and a change in dealer buying patterns led to the decline. Last year, we received typical strong orders ahead of our annual October price increase. This year we saw significantly less activity.

Overall, we see the US market as stable. We believe that our growth will pick up in the fourth quarter. Our adjusted EPS was $0.66, unchanged from last year.

Net income grew 66% and was offset by the increase in shares outstanding. Our net income benefited from a lower tax rate. When we structured the merger, we disclosed that there were multiple synergy opportunities to capture. I am pleased to report that our tax team has been supporting our integration activities, which has yielded some tax efficiencies.

Before I turn the call over to Uli, I wanted to comment on our capital deployment. During the third quarter, we repurchased $100 million of our shares. Year to date, we have bought $700 million worth of our stock. I am also pleased to announce that the Board has authorized us to repurchase an additional 5 million shares.

In September, we completed the acquisition of MIS. We can now address the faster growing $1.5 billion value market. This is a great addition to our DENTSPLY SIRONA implant portfolio.

In addition, we operate in a very fragmented market where there is ample opportunity for more consolidation. Our balance sheet remains strong and gives us the flexibility to pursue multiple avenues to create value. Lastly, of course, we have continued to return capital to shareholders through our dividend.

Overall, I am pleased at where we are on our strategic initiatives and how our organization is coming together. Growth is a top priority for DENTSPLY SIRONA and a major reason for why we merged.

We are positioning the Company for top and bottom line growth. As you saw in the press release today, we are bringing the low end of our guidance range up by $0.05 per share, reflecting our continued confidence in the business model and our prospects of going forward. I will now turn the call over to Uli who will review our third-quarter financials.

Thanks, Jeff, and good morning, everyone. This morning I will discuss our US GAAP results, as well as our non-GAAP adjusted results. As I walk through the earnings performance, I will also point out major impacts of merger accounting on our results.

In the third quarter, our reported revenue increased $305.3 million to $954.2 million, up 47%. Adjusted sales of our combined businesses, excluding precious metals, grew 0.4% on a constant currency basis. Internal growth was flat, including an 80-basis-point favorable impact from net acquisitions and a 40-basis-point unfavorable from discontinued products.

Foreign-exchange movements were a tailwind to revenue of 40 basis points. As a reminder, these growth percentages reflect the performance of the combined business as if it had been consolidated on January 1, 2015.

Jeff already addressed revenue growth by geography and segment. We had provided reconciliation tables for every segment and region that will help you understand how the GAAP reported revenue and internal growth come together.

US GAAP gross profit was $513.6 million, up $144.1 million, or 38.9%, from $369.5 million in 2015. Gross profit as a percentage of net sales, excluding precious metal content, decreased by 400 basis points to 54.7% from 58.7% in the prior year.

As you can see on the non-GAAP reconciliation tables, the gross profit margin was negatively impacted by 320 basis points, mostly due to the effects of step-up amortization and other merger-related items.

On an adjusted basis, gross margin was 57.8%, down 230 basis points for the quarter. Unfavorable product mix and foreign exchange impacts offset the benefits of savings from the global efficiency program and favorable product pricing.

Reported SG&A expenses, which include R&D, was $379.1 million, up $114.8 million, or 43.4% versus last year. This equates to 40.4% of sales, excluding precious metals, 160 basis points below prior year. The decrease was primarily the result of SIRONA's lower operating expense rate, and savings from the global efficiency program, partially offset by increased amortization expense and other costs related to the merger.

Adjusted for non-GAAP items, including amortization expense and other costs related to the merger, SG&A expense was $348.3 million, or 37% of sales excluding precious metals, representing a 200-basis-point improvement. This ratio was largely unaffected by FX. Restructuring expenses were $7.9 million, up from $6.6 million last year.

In total GAAP operating income was $126.6 million, up $28 million, or 28.4% from last year. [Including] the non-GAAP items set forth in our non-GAAP financial measures, adjusted operating margin was 20.8%, down 20 basis points compared to the 21% last year. Margins benefited from the positive impacts of the global efficiency program and the consolidation of SIRONA. FX had a negative impact of approximately 50 basis points on the rate.

Net interest expense for the third quarter was $7.9 million, $1.3 million lower than prior year. Other expense in the third quarter was $1.6 million, a swing from a net gain of $3.8 million in the prior year. This $5.4 million negative impact is driven by changes in gains and losses from currency transaction and hedges.

For the three months ended September 30, 2016, we recorded US GAAP income tax expense of $24.8 million versus $19.6 million last year. During Q3, the Company recorded $5.1 million of tax expense related to discrete tax matters. Excluding these discrete tax matters, the Company's effective tax rate was 17.8%.

The Q3 effective tax rate was favorably impacted by an update of our annual estimated tax rate. It includes the combined benefit of the first three quarters. After completing major steps of our integration, we now anticipate our annual effective tax rate to be 21%.

Q3 US GAAP net income attributable to DENTSPLY SIRONA was $92.5 million, up 9.5% from the prior year. Third-quarter 2016 diluted GAAP EPS was $0.39 compared to $0.59 in the prior year.

Adjusted non-GAAP net income grew 65.9% to $155.6 million. Adjusted earnings per diluted share were $0.66, the same as last year. Net income growth was offset by the impact of additional share issuance related to the merger. For a reconciliation of GAAP EPS to non-GAAP adjusted EPS( please see our earnings press release.

Cash flow from operating activities during the third quarter was $152.9 million compared to $159.7 million last year. Q3 2016 operating cash flows were negatively impacted by increases in working capital versus the reduction of working capital in Q3 2015. The single biggest item was related to the timing of customer payments, which we only received in early October.

Cash use in investing activities was $379.7 million compared to a source of cash of $36.2 million in the prior year. The primary driver of the change was the cash paid for MIS implants. Cash flow from financing activities was $237.1 million inflow versus an outflow of $55.4 million last year.

In Q3 2016 we returned close to [$113] million to our shareholders in the form of buybacks and dividends. We paid $419 million of long-term and short-term is borrowings, and we had proceeds of $760 million from long-term borrowings. We ended the quarter with a cash balance of $330.7 million.

On October 27th, subsequent to the quarter end, we issued EUR350 million of private placement notes with tenors between 8 and 15 years, and a weighted average interest rate of 1.4%. The proceeds were used to repay $375 million drawn under our revolving credit facility.

Now turning to guidance. For FY16, we now expect adjusted non-GAAP EPS in the range of $2.75 to $2.80 versus our previous range of $2.70 to $2.80. Our guidance includes the following key inputs.

So far, we have been expecting constant currency sales growth in the range of 4% to 6%, and internal sales growth of 3% to 5%. At current exchange rates, this would translate to reported revenues, excluding precious metals, of approximately $3.73 billion to $3.81 billion.

We now expect our revenues to be at the low end of the previously expressed range. This implies a return to mid-single-digit growth in Q4. We expect adjusted operating income margins in the range of 21% to 22%. We anticipate our adjusted tax rate to be approximately 21%. The EPS range [imply a year] share couunt of 220 million to 225 million fully diluted shares, and FX headwinds in the range of $0.08 to $0.10. I will now turn the call back to Jeff. Jeff?

Thanks, Uli. For over 100 years, DENTSPLY SIRONA has been a market leader in dentistry. We have differentiated ourselves through quality, innovation, and putting the customer first.

Our goal is to build upon our legacy in this very attractive market. We have an extraordinary opportunity to make a significant impact on the dental market, which will drive our growth.

The dental market is growing, supported by sustainable long-term demographic trends. In developed markets and aging population is retaining more of their natural teeth. In emerging economies, the growing middle class is demanding more dental care.

A significant part of our market is private pay. Short-term consumer behavior can impact a quarter or a product mix, but dental care is rarely postponed long. And we do not face the uncertainty associated with other healthcare reimbursement systems. Furthermore, oral health is continuously proving to be more important to overall health.

From a cost-benefit perspective, individuals and governments alike get significant return on their investment in dental. All of these factors make dental an attractive space.

There are other mega-trends, like general practitioners taking on additional procedures, the digitization of dentistry, single-visit dentistry, and the increasing demand for integrated work-flow solutions. All of these developments are growing faster than the market. DENTSPLY SIRONA was created to accelerate these trends. We are well positioned to benefit from them.

I am pleased to see how well our organization has come together over the last nine months. Our focus on culture is paying off. I've always believed that getting the culture right is the most decisive factor of the long-term success of the merger.

We continue to invest the time, resources, and people to create a winning and extraordinary culture. We've trained over 200 culture champions and launched cultural workshops across the globe. We introduced new branding to our customers. We are now beginning to accelerate integration activities.

In the third quarter, we truly began laying the groundwork for accelerating growth. We launched new products and initiated key revenue synergy work streams.

In August, over 4,000 dental professionals attended SIROWORLD in Orlando, Florida. This was the very first DENTSPLY SIRONA event in the US. The market was presented with the DENTSPLY SIRONA brand and the power of our end-to-end integrated solutions.

SIROWORLD was unlike any event in the past. Educational tracks spanned all across all general and specialty procedures. Dentists got trained on our leading technology, as to how they connect to each other. DENTSPLY SIRONA is the only Company that can offer dental professionals true end-to-end integrated solutions.

Our CEREC Zirconia package continues to accelerate adoption of CAD/CAM. The ability to do Zirconia chairside is expanding our market opportunity. New users are driving this growth. They are also becoming customers of our chairside materials, like CELTRA. We have a significant opportunity to capture share in this market. We are also seeing increased demand for our ORTHOPHOS.

3-D adoption is increasing rapidly. Our merger is clearly helping drive demand for digital dentistry. Our investments in R&D will continue to differentiated solutions. These will drive demand for our products and accelerate our growth.

We are in the very early stages of rolling out some of these solutions. In the US, we launched the new Midwest E Plus series electric hand pieces. This new instrument is yet another example of one of the many revenue synergies. With our E Plus series, we are able to leverage our world-class German engineering and manufacturing with our leading US Midwest brand and sales force.

For years, electric instruments have been standard of care outside the US. Today, electric represents only 15% of the market. With this synergy, we can take advantage of the growing trend, the largest market in the world. Early indications are that the Midwest E Plus is a winner.

Cross-selling and collaboration will also be critical to our success. Our lab business is a perfect example of how DENTSPLY SIRONA coming together will accelerate growth. By combining consumables, equipment, and services, we can address all the needs of the lab.

We are in a much stronger position together. Now that the business has been transformed, it is poised to gain market share. The strength in our organization for accelerating growth, we have been ramping up our country consolidation activities. These activities leverage our infrastructure and improve efficiencies.

In October, we initiated actions to reorganize and combine portions of manufacturing logistics and distribution. By reducing complexity, we can encourage collaboration and promote one DENTSPLY SIRONA brand. All of these actions will deliver significant cost savings and position the Company best for the future.

To date, we have been reinvesting a lot of the savings into investments that will generate growth. As we move ahead, we expect more of the savings to drop to the bottom line.

We have been continuously investing in our sales and service infrastructure. We began investing over a year ago and have continued. It typically takes 12 to 18 months to fully ramp up these sales resources. We are just beginning to see the benefits of these investments. We expect them to become larger contributors as we head into 2017.

Overall, I am very pleased with where DENTSPLY SIRONA is positioned today. We are executing on our cost and revenue synergy targets. We are investing in R&D, and sales and service to accelerate growth. We are excited about our new product offerings. We are also looking forward to introducing even more products at the International Dentist Show in March.

We expect to finish the year strong. We will accelerate growth in the fourth quarter. With the innovations we can offer today and our ideas for treating patients in the future, we are enabling dental professionals to improve, change, and save lives.

I'd like to thank our customers for their loyal support, trust, and enthusiasm for DENTSPLY SIRONA. We are pleased to recognize our distribution partners for their support.

I'd also like to extend a special thanks to our employees, who daily show their commitment to improve the lives of dental professionals and their patients. Together, we will change dentistry for the better. We will now address your questions. Operator, please proceed.

Thank you.

(Operator Instructions)

And we'll first go to Robert Willoughby with Credit Suisse.

Hi, Jeff, I was a little bit surprised, the equipment number a tough comp, but still came in a bit weaker. Can you give us any color n what sold, what didn't sell in equipment, with some focus on the US market? And then just secondarily, why do you believe consumables growth will pick up here shortly? What's the tangible data point? Is there an October experience you could speak to?

Sure. I appreciate that, Bob. Certainly, you have to step back and talk about the summer slowness. But, we were also able to have an extraordinary event at SIROWORLD in Orlando, and that's what -- we saw the excitement and end-user demand there. I don't think that's fully played out on the retail side translating to our purchases.

I have to tell you, I felt very good about what we saw on the CAD/CAM and on the imaging side. Certainly much more of a focus on the 3-D. I would tell you that intraoral continues to be slow, so you're not seeing the type of purchases by the manufacturers that we have in the past.

But, again, if you look at our overall business in its totality, we grew 6% in that prior quarter, and, overall, the equipment a year ago was up 18%. In this type of market, you can still do well, but it's muted with what happened.

I think the other thing, with regard to consumables, that gives us a bit of a confidence is that we told you in the prepared remarks that we didn't see the normal pre buys that we do before the price increase in October. But we know the sell-through was stronger, and we expect that to continue into the fourth quarter.

Okay. Thank you.

Thanks.

We'll take our next question from John Kreger with William Blair.

Hi, thanks very much. Jeff, maybe just to follow up on that, can you go through and dissect a little bit more within the US, how are your general and restorative consumables doing versus some of the more specialty-oriented products?

Well, I think we mentioned this last quarter, and I think it's fair to say that our specialty products outperformed on a growth basis. And we can give you a little bit of color on that. Chris, I'll be coming to you in a moment.

We're also pleased with the new products that we've brought recently to market in our restorative and preventive. We don't talk about this as much, but our Cavitron has shown, again, solid growth with a new product offering. Certainly, our Midwest hand pieces and the new one we discussed on the call has already shown a quick uptick in the lab area. We're just starting to launch the CELTRA Press and we're continuing to see sell through on our Cercon HT CELTRA Duo.

And when you take that, though, with our specialty business, ortho, strong growth; endo continues to be a stalwart; and implant had a nice quarter. Chris, you want to follow on that?

Yes, I would characterize it, John, as again, all three of those specialties were accretive to our growth. Implants, we see a nice improvement sequentially in terms of the unit growth.

We also see some sequential strengthening in the US, which we're pleased with. That's an area where we've had some very nice synergies, particularly relative to imaging at CAD/CAM and we certainly leveraged that at SIROWORLD. So, again, I think we're increasingly on our front foot there and feeling good about it.

On the ortho side, we had some nice improvements in a number of markets. We continue to do well in the US. That is a very competitive market relative to competition and declining ASPs, as a result of extra capacity. But, again, we're very pleased with the performance of our team there.

And on the endo side, we just continue to innovate and are very pleased with what's coming out from the R&D shop there. We launched the RECIPROC Blue file in the quarter and also our new 3-D endo software, which, again, both of while will be very nice platforms for us moving forward.

And just to talk about resto a little bit more, our Aquasil Ultra Plus, very excited about what that product is going to do for us. Early days on that. Team is going after the procedure, selling on class two, again, very strong.

I think you have to keep in mind that when you don't have the typical pre-buys in front of the price increase, that area will be affected more. We've got a lot of confidence that the fourth quarter is going to show better for our restorative business.

Great, thanks. Maybe just one quick follow-up given, that this is an IDS year. Any initial thoughts on 2017 and how that should roll out?

Well, it's -- we'll literally be rolling into IDS after one year together being able to put our teams, on all sides, from the R&D to sales and marketing, and I fully expect that the IDS will be one that will show what DENTSPLY SIRONA is all about as the dental solutions Company. So we're excited about that. That means bringing innovations, innovations that are going to change the dental professionals, how they practice and the impact on the patient.

Certainly we expect it to be a strong IDS. John, every IDS has to be better than the one before, and this is no exception. For us, as we think about 2017, we do expect, while I'm not going to give guidance on this call, to see growth accelerate, given what we're doing with our revenue synergies and how we're coming together.

Excellent. Thank you.

We next move to Tycho Peterson with JPMorgan.

Hi, thanks. A question on the equipment side. Can you maybe just talk about pricing ands competitive dynamics? Are you still able to get to the same amount of price, given some of the softness you're seeing? Could you talk specifically on CAD/CAM competitive dynamics? Looks like Schein had a pretty good quarter.

Yes. So there's many dynamics going on here. I think from a standpoint, and Tycho, you remember this when we launched it. We've always been about CAD/CAM for everyone. So we've had a product for years in each one of these segment areas, whether it be the digital impression only, all the way up to the practice lab. And so, that has certainly run the gamut.

We have seen more activity in the DI, which on an overall basis, would lower the ASP in that category. But we see much more sales on the Chairside, because it's a much more compelling proposition for the dental professional and certainly the patients that they serve. And so, the big winner for us continues to be Chairside with the MC XL and full functionality.

That being said, we did run a promotion on our DI which lowered the ASP to just under 30,000. But keep in mind that when you think about all of the functionality we're adding to the system, with the SpeedFire and what Zirconia can do, we're now allowing a dentist to do chairside, which they always relied on the lab.

Zirconia is the number one material used by dentists for restorative, and we're allowing that to happen chairside. And that's a bigger deal, and that's a big trend, and that's just getting started. That's early days for us, and we're very excited about that.

We're also very excited about our CELTRA Duo and what that offers and taking care of the dental professionals. So, you're right, there is more interest in DI than we've seen in the past, but DENTSPLY SIRONA is getting their fair share there. Although, we continue to see the best value proposition for the dental professional being chairside.

And is part of the enthusiasm for a fourth-quarter step-up taking in the 179 deduction, or are you expecting an impact from that?

Well, certainly, Tycho, it's gotta be better than last year. We had no real effect of it. So we do feel that should help. We also understand what we have in place with our revenue synergies going into the fourth quarter, and have a lot of confidence that the team is going to execute.

But keep in mind, we don't have baked into this a huge rebound in the US. And I would remind everybody that while 179 is important, we're cautiously optimistic on that. And I would tell you that a major driver for us will continue to be rest of world, where we're really pleased with what we're seeing in Asia Pacific. And, frankly, even in Latin America we saw Brazil, which has been challenged, show the way. So, one of the beauties of DENTSPLY SIRONA is our geographical balance and what we're able to do.

Okay. Thank you.

Thanks.

We move next to Brandon Couillard with Jefferies.

Thanks. Good morning. Uli, any chance you could give us the delta, the spread between the sell-in and the sellout in the US in the period? Just want to get a sense of the effect of the channel adjustments on the US growth in the third quarter.

Let me just say one thing and then I'll turn it over to Uli. But, look, it was significant; this is why we highlighted it. It had an impact on us, but these are the puts and the takes of it. It also gives us some of the confidence with regard of our market share, because on the retail side of it, the sell through, we know we continue to grow there. Uli.

Yes. We mentioned that we saw a lot less of the pre-buy activity at quarter end going on, and there is definitely a discrepancy between what the dealer [supplied] from us and what they sell into the market. We think that on the sell-through side, it's probably low single-digit growth, right?

So we cannot really, quantify for you the exact difference, but there is a difference. And I believe we would have certainly grown on our consumables side in the US if we would have had a regular pre-buy activity. So sell-through is good I think.

Yes. I think that's the takeaway. Chris, certainly you've been around a while here, any other color you'd like to give Brandon?

Brandon, I think that, obviously, there are some years where the dealers may flex a little bit higher and a little bit lower, and overall this was a little bit of a lower year. There is a disconnect. I think the best way to characterize it is we, again, we had a positive overall, retail number for the US again. And on top of that, we would have been positive on consumables in the US, but for that disconnect.

So, again, it is one of those phenomenons that we do see come in and come out, depending on how much the dealers want to expand or not in that given time or in terms of buying in advance of the opportunity.

Okay. Thanks. And, then Jeff, how do we -- how do you think about the process of integrating the two IT systems? Is that a near-term priority, and is that necessarily a prerequisite to enabling real revenue synergy opportunities to emerge?

I wouldn't -- I'm also going to pass this to Uli in a sec, but I would say that no, we're not waiting on the IT systems to merge. We've got a lot of similarities. Certainly, IT is very important and critical to us, because one of the things that is significant that we need to be able to do is standardize processes. That's critical, and IT is the enabler that helps us there.

But, from a standpoint of waiting on what we're able to do for IT, I wouldn't say that was the case. The big thing that, we've been focused on, and I think you're going to see the impact of it, is building a very strong culture. That's something I've believed in from day one, same with the management team and the Board, that you've got to invest this early. This is the decisive aspect of why you win in the end with a merger of our magnitude.

And it really comes down to being able to take people to a place of putting us together to learn from each other, then going through the integration, which is the phase we're really going on, which has many restructurings within it. And then you're really talking about transformation. That's why we've talked to you about a three-year process that we're undergoing.

But I know you had a question more about IT. Anything else you want to say that about that, Uli?

Yes, Brandon, maybe we should clarify, you said combining or unifying the two IT systems. We never had one IT system in each Company; each Company has an array of different IT systems and each parts of the Company has a program to standardize and unify these IT systems more, and we're continuing to do this. I would say on the front end, this is not a big obstacle, right? Although we are investing in CRM, this is part of where the money goes that we saved through our efficiency programs, and this should help. But it's more of a productivity improvement at this point, I think, and I do not believe that this is an obstacle to our sales growth.

I think it will help us next year and the years beyond, no question about it.

Great, thanks.

We next move to Steve Beuchaw with Morgan Stanley.

Hi, good morning. Thanks for taking the questions. I'll start with one --

Hi, Steve.

On capital deployment. I appreciate the commentary this morning on the expansion of the repurchase authorization. I wonder if you could give us a sense on capital deployment about two things. One is the pace of share repurchase, let's say, over the next 12 months, given that we've had a pretty big 2016 to compare to for obvious reasons, subsequent to the combination and the MIS deal. And then sub-par to the capital deployment question, number two is MIS, a deal of this size of MIS potentially in the cards for next year, or should we expect smaller tuck-in-type transactions?

So pace of share buyback was the first one. I think we always said that our higher priority would be to acquire, and if we find good opportunities. So, we will not commit to a regular pace of buyback at this point. I think it's fair to assume that it's going to be lower.

We did a big part of the buyback with the cash that was on the SIRONA balance sheet when we merged, which then, through the combination of the two businesses we could very effectively bring back to the US and return to our shareholders. This opportunity was at the beginning, and we do not have a similar one in the same magnitude going forward.

So the first priority will be acquisitions, right? But what is left we would return to shareholders. But, again, pace will be lower, right? We've done $100 million in Q3, and that's as much as I would say to this for now. MIS, maybe Jeff, you want to answer on the pipeline?

Yes. I would say keep in mind, Steve, that we're going to be opportunistic. It's discretionary, so we'll keep you on your toes about our buying. From the standpoint of over the next year, we will continue to do small acquisitions, and we've got some bigger ones on the horizon.

So we've got to keep in mind that the pricing we paid for MIS was very strategic, has synergies within it, and that the level of spend for an acquisition would not concern us, but it's gotta be right and we've got a couple that we think could make a lot of sense for us.

Okay. Appreciate the color there. Second question relates to deal integration, but it's more on the operational side as opposed to the technology side. So following up there, how do you go about going through the integration, monitoring progress on metrics that help you understand the potential for any commercial or other disruption? And how would you describe the process on those metrics so far? Thanks so much.

No. I think this is an excellent question, Steve, because it's one that, you have to put in the front of before you even start as one Company. Putting together the team, which we had a PMO which is now an IMO integration office that's working through all of the complex aspects of it, from country formation to looking at how we become more efficient and effective, and leverage ourselves.

And certainly it's what we looked at when we first put our guidance together, so we're able to look at areas where, if it were, to be able to have an impact on it. That's why you spend so much time the first six months really planning and stabilizing your organization to be able to be focused on driving our growth, meeting our guidance expectations. But then also, preparing ourselves to be able to do the heavy lifting of integration.

And certainly, you saw, with our tax today that we had a synergy which came from the proper planning with the tax team that was able to do that. We felt confident that we were executing at a high enough level that we raised the bottom of our guidance range by $0.05, which is significant. And we also, when we look forward to the fourth quarter, we have metrics that give us confidence about the revenue synergies that we will be able to execute on over the next few months.

And certainly, you have to keep that -- two things separate from the ongoing process of integration and the restructuring. And that's, one, having your sales force focused. We, going into this, we're very clear about that. We broke it down into five RCO regions, actually have the regions reporting in to me, so I get a lot of visibility. We have a team that is focused on giving us the insight on where the revenue synergies are coming from.

Keep in mind, we talked about that we had close to 200 work streams; we've now been whittling that down to the ones that are working best. We were able to deal with the SIROWORLD, which we saw -- the whole management team was able to see what's capable and isolated to an area.

And then, the other part which is so important is that it doesn't disrupt our ability to innovate and bring products to market faster. We have not seen anything, with regard to the integration, slow our product cycle, which is critical, especially as we get to the point of readying ourselves for an IDS for next year.

We talked about that this merger was all about growth, and growth comes from our tremendous brand and product portfolio, our sales and service infrastructure, our clinical education, and our ability to launch new products. And we've said that we have a high standard. That's our life blood, new products, and we have not missed a beat. And I give a lot of credit to our CTOs and Jim and Chris for their leadership here. We continue to move well.

Jeff, I can't tell if you have strong feelings here or not. (laughter)

We've got a great organization, a tremendous franchise, very talented people. And, we're working hard here. I don't want to make light of the fact that there's a lot to do, but we're focused on recognizing that we made commitments when we gave guidance, and also the long-term opportunity, which will be truly extraordinary for this organization.

We talked about this being transformational. That doesn't happen overnight. It happens with the right people, the right strategy put to work with our products.

Really appreciate that, Jeff. Have a great morning.

Okay, thanks.

We next move to Jeff Johnson with Robert Baird.

Thank you, good morning, guys. So, Jeff, just wanted to start with you. Looking at the fourth-quarter guidance, I think a lot of us are trying to feel out what you're seeing in the end markets, how you're feeling about the end markets. But it seems to me your fourth-quarter guidance implies organic growth of maybe around 3% or so. The comp gets 200 basis points easier. You pick up maybe 0.5 point across the product lines in pricing. Some of the distributor channel drawdown comes off a little bit.

So it seems like to me you're basically saying end markets have been soft, going to maybe remain a little bit soft. There's not really a whole lot of implied end-market improvement in your fourth-quarter guidance, but you can still get to a 3% number. Is that a fair way to summarize it all?

Well, I think it is a fair way to say that we feel the market has stabilized. We have not put into our numbers an improvement. So if Section 179 were to do a great job in stimuli, that's certainly upside.

To that, you're right about the comp gets easier in the fourth quarter for us. We feel good about the mega-trends still are in place. In fact, we like the idea that more and more distributors and dentists are talking about going 3-D and the importance of single-visit dentistry and digital dentistry, and certainly being the market leader here plays right to us.

We've got some real strong visibility in our revenue synergies and rest of world looks very strong for us, and, frankly, our specialty areas in the fourth quarter look good across the board. So that is what gives us the confidence to talk about what our implied guidance says about revenue.

All right. That's helpful. Thank you. And, Uli, maybe two just clarifying questions for you. The 21% tax rate that you're guiding to for the year now after the catch-up in 3Q, is that a good go-forward rate, how to think about beyond 2016?

And then in the third quarter, it looks like to me operating margins, if I mash both DENTSPLY and SIRONA models together last year operating margin was down maybe 50 basis points or so. Both Companies had good, strong improvements last year in the third quarter. So do we get back to a pro forma or combined operating margin improvement trend line as we move into next year? Is that still on the table?

Let's maybe first start with the tax rate question. I was expecting that you would ask that. Let's start with [busiest] rate. We've made some changes to our tax structure and did some reorganizations, mostly in Europe, which we have completed now. These reorganizations take advantage of the very complementary tax attributes that we had in these two businesses, right?

We also have enough visibility in this time of the year to have a good sense of the geographical split of our taxable income. This means in which jurisdiction, under which tax [regime] we'll have roughly what type of income. So we have a very good sense now on what we think the tax rate for the year will be, and that's why we lowered it to this 21%. I don't want to give any guidance or outlook for 2017 on this --

It's too early.

It's too early. There's always -- we don't have a good feel yet of the geographical split. We also do not know what the tax laws will do, right? There is always, I would say, upside bias on rates from tax regulation. But what we've done is a structural improvement to our tax efficiency.

I think, Uli, you and the team should think about its outstanding work to structure this, and this isn't the first time that we've been able to show this. And I just remind people that in the first quarter, we were able to do some nice early synergy work to pull out $76 million from reserved tax assets. So we're doing the right thing, which means that there's a lot of levers to pull and we've got the smart people on our team to think it through.

Jeff, any comment on the margin part of the question, just on how comfortable you are going forward on margins being able to improve off of this quarter that looks like they were down just a bit?

Well, we wouldn't say they were down, right? If you look at it, we were down 20 basis points reported, but we had 50 basis points headwind from currency. So net-net, it was about 30 basis points improvement, right, what we've reported.

And, we are, as we move into the fourth quarter, we are increasing some investments relative to getting ready for IDS. We are increase our R&D spending in the third quarter of this year versus last year. We will ramp up even a bit more in Q4. Some of the marketing activities in preparation of this event will ramp up. But overall, we feel good about our margins.

I would like to see us leverage our infrastructure a little bit better. And longer term, you should see that certainly pick up on the operating income side of it, and, let's certainly see how this quarter play out. There's some possibilities for that.

Thank you.

I think what you also have to keep in mind, since we have basically flat revenues, any little increase in operating expense, plays out in the margin deterioration, right?

Right. But I think the takeaway, Jeff, is that we're very focused on our margin profile and how we leverage our business and what the incremental sales dollar brings to the bottom line.

And we'll take our next question from Steven Valiquette with Bank of America Merrill Lynch.

Thanks, good morning, everybody. Thanks for taking the question.

Good morning, Steven.

Good morning.

For us, not to beat this consumables trend in the US to death, but I think what was still maybe a little bit unclear from some of the discussions so far is basically why do you think there was no buy-ins activity this year for the distributors? Is it really just as simple as the channel was maybe a bit overloaded with supply already, maybe in late 3Q, because of the summer slowdown, or was there just some other factor? Just curious on that. Thanks.

I think the summer slowdown certainly was a real concern, if you're a distributor and seeing it at the retail level. This wasn't unusual for the some of the other markets, retail in general, restaurants. And so if you start -- even though the summer is very much about September, so it's a one-month quarter, it starts to get in a mindset and you wonder how long this is going to last. And if you feel relatively comfortable with your inventory level, you know that you can count on DENTSPLY SIRONA for the fourth quarter, we're going to be able to make the product. So you actually, slow down your purchases. And now I've been very clear, we were surprised by that level of reduction. And so, to us if we had thought that would have been the case, Steve, we would have told you different things on our August call, frankly. But those purchases really aren't decided until the -- I think, Chris, it's fair to say the last two weeks in September?

Yes. I think dealers look at it relative to where their inventories might be. They look at it relative to the size of the price increase, which is pretty similar to other years. So I don't think that was a major factor, Steve.

But, again, I think they factor in probably interest rates and other things, and look at it and go, okay, how deep do they want to go? And some years, again, it'll go deeper and some years it'll go less.

And you characterized it as no buy-in. I wouldn't characterize it as no buy-in. What I would characterize it is a smaller buy-in than certainly what we expected or certainly what we had in the prior year, okay?

The point is that, as Chris said, when something changes like that and it can have a material effect on the quarter, it shows up. I don't think we're -- what you should be taking away from this, Steve, is that we don't believe that this is an effect that will continue on into the fourth quarter. That's what's important.

Okay. Got it. Okay. Great. Thank you.

Thank you.

(Operator Instructions)

We next move to Jon Block with Stifel.

Hi, guys, good morning, and for once, I'll actually adhere to the suggestions of one question.

This is a first.

It is a first. So you seem confident on the revenue synergies playing out. And some rough math would say that the revenue synergies would give you about 150 to 200 basis points to incremental growth next year. So just to be clear, when you say accelerating growth in FY17, is that on the underlying business of 3% and change this year, or is that inclusive of the 200 BPs from the revenue synergies? Thanks, guys.

Yes, let's not cut the baby in half and look at the inside. This is on the totality of our business, accelerating it. And I think we understand what the goals are from our own perspective of, we want to be a leader in this market on growth. That's why we did this merger. And what, more importantly, that revenue needs to translate to growing our earnings faster, and this is all what went into us giving that indication.

I'll keep it to one. Thanks.

Thanks, Jon.

We next move to Robert Jones with Goldman Sachs.

Hi, this is Nathan Rich on for Bob this morning. I'll keep it to one as well. On the DSO segment, we saw Patterson announce an agreement with one of the largest DSOs in Heartland a few weeks ago. I'm just wondering, given your exclusive arrangement with Patterson for the distribution of SIRONA equipment in the US, is this a new opportunity for you guys to serve this customer? And maybe just more broadly, can you talk about how you're working with Patterson to go after this segment of the market?

Sure. We haven't seen things change. Heartland is a customer of ours. We certainly believe, given the relationship that we have with Heartland and with Patterson, that we would expect to do more in the future, and we would hope to do that. I think this also is an indication that Patterson is again showing their seriousness of being a player in the DSO market. Heartland is absolutely the largest. We have a very strong relationship with Pacific Dental, which is right up there with Heartland, and we would expect that to continue.

When you look at the breadth of portfolio that DENTSPLY SIRONA has from the specialty to the technology, to the opportunities to change the practices efficiency, then you couple that with our world-class clinical education, I think we've got a lot to offer the DSOs. And we have a strong relationship with many, and I think it's just going to get better. Chris, do you want to say anything?

No, I think you hit the pertinent points. Again, bottom line is we have good relationships today, we have good relationships through each -- all of our dealers in the DSOs. And, again, we expect that to continue moving forward.

Thank you.

We next move to Matthew O'Brien with Piper Jaffray.

Good morning. I understand that you don't want to talk too much about 2017 at this point, but as you talked about the tax rate, it doesn't seem like that's certainly going any higher to go higher or has a bias to go higher, most likely lower. You're talking about dropping more of your cost synergies to the bottom line going forward, and then I'd assume MIS is accretive and you've got a fairly easy comparison here.

My math is coming up with low double digits if not low teens EPS growth for next year. Is there anything that's unrealistic about that math?

We don't want to talk about 2017 on this call. It's a good try, right? But I explicitly told you we're not guiding on the tax rate. Nobody knows what the tax laws will do between now and the beginning of next year. We don't have visibility yet on our -- on the geographical split of our revenues, nor do we know how the end markets will involve. So we don't want to comment on 2017 now.

But I would strongly encourage you to listen to our call in February, where we will.

But just, sorry, to follow up real quick, the components of what I'm talking about, though, the buyouts for the tax rate to go lower seems to be there. You're saying you're going to drop more to the bottom line. I would assume MSI, given the high margin there, are accretive.

Look, I'll talk about two things. First of all, MIS is very strategic for us. We're not in the value segment, which is one of the few segments in all of dental that we're not in, and it was $1.5 billion. Chris is sitting next to me smiling like a Cheshire cat, because he sees all of the strategic opportunities to go there. And, yes, we expect to have synergies in 2017, with that and certainly beyond. And there's a lot of exciting things that we can do with bundling, with MIS, and certainly with our Astra and other branded implants. So I think that's a fair comment.

We've also said that we expect to accelerate our growth from this year, that -- and we want to be better at leveraging our infrastructure. Those are fair statements. Order of magnitude, we're just not going to get into at this call. Let's focus on executing on the fourth quarter, making our guidance, getting some of the heavy lifting that we need to get done in the fourth quarter and start 2017 strong. That's the way I would frame it, and I would be cautious about lowering our tax rate.

Thank you.

We next move to Matt Miksic with UBS.

Hi, good morning. This is Vik Chopra in for Matt Miksic. Thanks for taking the question.

Hi Vik.

So just one quick question for me on the MIS acquisition, you've now closed it, and can you just update us on where you are in terms of integration, sales force retention, et cetera? And if there are -- what pull through we should expect from MIS as you combine this with a much larger sales force and a much larger organization? Thank you.

I'd love to turn this to you, Chris.

No problem. Vik, obviously as Jeff mentioned, as we mentioned previously, we were very excited about the MIS acquisition. And it gets us into a $1.5 billion space that we've not been in before. There's not too many spaces like that in dentistry that we're not in.

It's going to be accretive to our growth. This Company is well positioned in that space, in a number of markets, including a number of emerging markets, which are certainly helpful to us.

I would characterize -- we had the business for I think all of 10 days, 11 days during the third quarter, so, again, we're early days here. But I would say the integration teams are very active.

Recognize that we plan to, and I think we announced this earlier, to operate these separately than our premium implant business, because, quite frankly, we believe these are distinctive segments and we have unique opportunities to address each market separately or each segment separately. So we are not looking to combine sales organizations. We are not looking to combine these businesses commercially.

And so, as such, you asked about sales retention. There really should not be an issue relative to sales retention, because, quite frankly, their roles don't change at all. So, again, there's a number of opportunities strategically between -- with MIS and some of our digital assets. There's a number of opportunities operationally as well, and I think we're -- again, I'm pleased, early days, with how the teams are engaging on this. But we're early days. So, again, we'll comment more as we get into it, but so far so good, and we're excited.

Yes. I think you'll get a better understanding of that on our February call. We'll try to unpack the benefits of MIS to us.

And, ladies and gentlemen, that does conclude today's question-and-answer portion. I would like to turn the conference back over to Derek Lechow, Vice President of Investor Relations.

Thank you, Shannon. Thank you all for joining us today on this call. If you have any followup questions, Josh and I are available to assist you and hope you all enjoy the holidays. We'll look forward to talking to you again in February. Good-bye.

Ladies and gentlemen, that does conclude today's conference. You may now disconnect.