DENTSPLY SIRONA Inc (XRAY) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the DENTSPLY SIRONA First Quarter 2017 Earnings Conference Call. As a reminder, today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Derek Leckow, Vice President of Investor Relations. Sir, you may begin.

Thank you, Ellen, and good morning, everyone. Welcome to our first quarter 2017 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 statements on Slides 2 and 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 predictions.

And with that, I'll now turn the program over to Jeffrey Slovin, Chief Executive Officer of DENTSPLY SIRONA. Jeff?

Thanks, Derek. It is my pleasure to welcome all of you to our first quarter 2017 conference call. Also joining us on the call today, Chris Clark, our President and Chief Operating Officer, Technologies; and Joshua Zable, Vice President of Corporate Communications and Investor Relations.

Before I begin, please note that our CFO, Uly Michel, will not be on the call today to attend to a medical issue. We look forward to his return next time.

Turning to the call, our results this quarter were far from stellar, but I am pleased that we are able to deliver on critical strategic objectives. We are now better positioned to accelerate our short and long-term growth.

In March, at the International Dental Show, DENTSPLY SIRONA set the standard for what it means to be a total solutions provider for the dental professional and labs.

We unveiled how an enabling technologies integrated with procedural solutions provide better clinical outcomes. We also reinforced our position as the innovator in the industry. At the show, we launched 50 new products, which will drive our growth for years to come.

This morning, we also announced our plans to expand distribution in the U.S. market. We are excited to expand our partnership with Patterson, with a new long-term U.S. distribution agreement that will help drive adoption of our digital technologies and solutions for years to come.

Together, over 20 years, we've created CEREC as the standard for single-visit dentistry in the U.S.

We're also excited to expand our relationship with Henry Schein in North America. With a new 3-year agreement, beginning in September, under which Henry Schein will begin selling our leading equipment brand in the U.S. This should benefit all of our product lines, including Schick sensors, treatment centers, extra oral imaging and of course, CEREC as well.

Both Patterson and Henry Schein will be critical drivers in accelerating adoption of our digital technology and our unique integrated solutions.

We firmly believe our no -- and now new go-to-market strategy in the U.S. will accelerate our growth for years to come. I will discuss this in more detail later.

Our merger-related initiatives are on track. We will ramp cost and revenue synergy activities throughout the year, driving top and bottom line growth for 2017.

Turning to the quarterly results, first quarter internal sales declined 4.7%, driven by decline in technology.

Consumables and health care grew 2.4% this quarter. Our consumables business grew in each of our 3 regions.

Technologies declined by approximately 13% or $57 million. Growth was unfavorably impacted by approximately $40 million as a result of quarter-over-quarter changes in net equipment inventory levels at certain distributors in North America and Europe related to the transition in distribution strategy in North America.

The remaining decline is attributable to weaker retail performance. The largest contributor being the U.S., where the transition to our go-to-market is having an impact.

Turning to geographies. This quarter, Europe led the way with 2.2% internal growth. Consumables growth offset no growth in technologies. Revenue synergies are creating momentum for us in Europe. Based on our assessment, our consumables outpaced the market for the second quarter in a row.

Technologies in Europe was essentially flat. We were able to compensate for the unfavorable impact of a $5 million change in net equipment inventory and the slowdown ahead of the International Dental Show.

As a reminder, in Europe and in Germany in particular, many of our customers wait for the show to purchase new equipment. We are pleased to report that we had a record order intake at the event. Our success at the show across both technologies and consumables highlighted the power of our merger.

Rest of World was down 5.2% on top of last year's 7.5% growth. $5 million or 220 basis points of the decline in Q1 was driven by a change in net equipment inventory level at the distributor in [Canada] associated with the transition of our distribution strategy in North America.

The remainder of the decline was driven by the Technologies segment, where we had very strong growth in certain countries last year. In Q4 2016, the region grew almost 10%, driven by Technologies.

We continue to expect the Rest of World region to be our fastest growing region this year.

U.S. sales were down 11%, driven by decline in Technologies, as I already discussed, the primary driver of the decline was due to equipment inventory changes and to a lesser extent distributor retail performance.

Our North American's consumables business grew low single digits. We were pleased to see the business accelerate sequentially from the fourth quarter. We continue to believe that North American market is stable and showing modest improvement.

During the quarter, we continue to do our active capital allocation program. We bought back another 40 -- $85 million of stock, and announced a small, but strategically important acquisition. Using our strong and flexible balance sheet will continue to be a lever for us to increase shareholder value.

I'll now turn the call over to Josh, who will review our fourth quarter financial and outlook.

Thanks, Jeff and good morning, everyone. This morning, I will discuss our U.S. 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 first quarter, our reported revenue increased $127.9 million to $900.5 million, up 16.6%. Adjusted sales of our combined businesses, excluding precious metals, declined 2.2% on a constant currency basis.

Internal growth declined 4.7%, excluding a 250 basis point favorable impact from net acquisitions.

As Jeff already explained, overall sales were unfavorably impacted by approximately $40 million or 430 basis points as a result of net changes in equipment inventory levels at distributors related to our transition and distribution strategy in North America.

Foreign exchange movements were a headwind of revenue of 130 basis points. As a reminder, these growth percentages reflect the performance of the combined business as if the merger had been completed on January 1, 2016.

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

U.S. GAAP gross profit was $492 million, up $73.1 million or 17.5% from $418.9 million in 2016. Gross profit as a percentage of sales, excluding precious metal content, decreased by 20 basis points to 55.3% from 55.5% in the prior year.

As you can see on the non-GAAP reconciliation tables, the gross profit margin was negatively impacted by 360 basis points, mostly due to the effects of step-up amortization and other merger-related items as compared to 510 basis points last year.

On an adjusted basis, gross margin was 58.9%, down 170 basis points for the quarter. The majority of the decline is associated with a lower gross profit rate on equipment associated with the timing of the merger.

Last year's gross margin was favorably impacted by the consolidation of only the strongest sales month over the quarter for Sirona, with a more favorable product mix.

Reported SG&A expense, which includes R&D, was $404.7 million, up $62.6 million or 18.3% versus last year. This equates to 45.5% of sales, excluding precious metals, 20 basis points above prior year.

Reductions in business combination related costs, fair value adjustments as well as amortization of purchased intangible assets and similar items benefited the rate by 330 basis points.

These benefits largely compensated the rate increases driven by the lack of revenues associated with equipment inventory reductions, biannual trade shows and other selling events as well as the effects of acquisitions and foreign exchange.

Adjusted for non-GAAP items, including amortization expense and other costs related to the merger, SG&A expense was $377.3 million or 42.3% of sales, excluding precious metals, representing an increase of 390 basis points.

This year, IDS and selling events added approximately 135 basis points, and lower sales from dealer inventory reduction also impacted the rate by approximately 180 basis points.

FX and acquisitions cost us about 50 basis points. The rest of the increase is the balance of investments in selling and R&D, offsetting savings in G&A.

Restructuring expenses were $3.1 million, down from $4.1 million last year. In total, GAAP operating income was $84.2 million, up $11.5 million or 15.8% from last year.

Excluding the non-GAAP items set forth in our non-GAAP financial measures, adjusted operating margin was 16.6%, down 560 basis points compared to 22.2% last year.

As discussed, the gross profit margin rate was down 170 basis points, with favorable impacts from the timing of the merger last year and unfavorable impacts from equipment distributor inventory reductions this year.

In addition to this headwind, operating margins for the current year were impacted by higher operating expense rates by 390 basis points as discussed a moment ago.

Net interest and other income and expense for the first quarter increased by $2.3 million compared to the prior year.

For the 3 months ended March 31, 2017, we recorded U.S. GAAP income tax expense of $16.9 million versus a $57.9 million benefit last year. As a reminder, last year's first quarter taxes benefited from a $76.1 million valuation allowance release related to the merger.

This year, we have $6.3 million of discrete excess tax benefits related to employee share-based compensation. For our existing policy, we exclude discrete tax items from adjusted earnings.

On an annual basis, we now estimate our adjusted effective tax rate to be 19.2% compared to 23% in the first quarter last year and 20.8% for the full year 2016.

Our lower tax rate is a benefit resulting from the complementary tax attributes of the merged companies.

Q1 U.S. GAAP net income attributable to DENTSPLY SIRONA was $59.8 million, down 52.1% from the prior year. First quarter diluted GAAP EPS was $0.26 compared to $0.70 in the prior year. Adjusted non-GAAP net income declined 7.1% to $113.7 million.

The decline in net income reflects the lack of revenue largely associated with changes in net equipment inventory levels at certain distributors.

Adjusted earnings per share was $0.49 compared to $0.69 last year. The $0.20 decline in adjusted EPS was driven by the effects of the higher share count, partially offset by additional 2 months of Sirona and the effects of the distributor equipment inventory changes. In addition, FX created a $0.03 headwind.

For reconciliation of GAAP EPS and non-GAAP adjusted EPS, please see our earnings press release. The year-over-year comparisons in the cash flow statement are less meaningful this quarter, given the timing of the closing of the merger in February last year. I will discuss elements of the cash flow statement this year, highlighting the key drivers.

Cash flow from operating activities during the quarter was $82.5 million. Cash used in investing activities was $41.1 million. Capital expenditures were $31.1 million for the quarter. We continue to expect CapEx for the year to be in the range of $120 million to $140 million.

During the quarter, we paid $78 million for share repurchases and paid $18 million in dividends.

Now turning to guidance, for fiscal 2017, we continue to expect adjusted non-GAAP EPS in the range of $2.80 to $2.90. Our guidance includes the following assumptions: constant currency sales growth to range from 4% to 6%. This includes approximately 150 basis points of net benefit from acquisitions divestitures, implying internal growth of 2.5% to 4.5%. At current exchange rates, this translates to reported revenues, excluding precious metals, of $3.95 billion to $4.03 billion. We now expect our adjusted effective tax rate to be 19.2%.

Our EPS range implies a full year diluted share count of approximately 231 million to 233 million shares versus the 222 million in 2016. This reflects approximately $0.09 of headwind at the midpoint and is simply a function of the timing of the merger.

We still anticipate FX headwinds of $0.08 to $0.10 for 2017.

As we explained on our last call, we will continue to experience headwinds associated with inventory reductions. For now, the inventory reductions are expected to continue to negatively impact our net sales into the third quarter of 2017 by approximately $50 million to $60 million in total.

As other market channels are brought online in the third and fourth quarter, sales through these channels could offset the majority of the mentioned inventory reduction, resulting in a net of $10 million to $20 million unfavorable impact on our revenues for the remainder of the year.

We expect this to translate into a much stronger back half of the year. As always, I suggest our investors evaluate our business on an annual basis as our quarterly progression can vary.

I will now turn the call back to Jeff.

Thanks, Josh. As the dental market grows, DENTSPLY SIRONA will truly be the partner of choice to deliver better, safer, faster dental care to meet the growing demand.

Dentistry's importance is being recognized as a critical driver of overall health. In the past quarter alone, multiple studies have confirmed the importance of oral health. At the American Stroke Association's International Conference, research was presented linking periodontal disease as a potential cause for stroke.

A large study in Japan found that patients who retain more of their natural teeth were less likely to develop dementia. In March, the Journal of The American Medical Association published an article highlighting data that showed poor oral health can trigger autoimmune disorders such as rheumatoid arthritis.

In both developed and developing markets, a heightened awareness about the importance of dental care is driving increased demand. Coupled with sustainable demographic trends, our industry has a long runway of growth ahead.

A significant part of our market is private pay. As other health care providers brace for health care reform, our customers can focus on how to best serve their patients.

At the IDS, it was clear that dental professionals want to treat their patients with best-in-class integrated solutions. DENTSPLY SIRONA can be -- best support both the individual practitioners and group practices with efficient and effective end-to-end workflows.

As many of you know, group practices are the fastest growing segment of the market, and an area where DENTSPLY SIRONA is significantly underpenetrated, particularly in terms of equipment.

One of the rationales for the merger was that by coming together, we could offer groups an unmatched value proposition. With the broadest clinical education platform, end-to-end solutions that create more efficient practices and technologies that greatly enhance the patient experience, DENTSPLY SIRONA is an ideal manufacturer partner for groups.

In Q1, we expanded our relationship with Aspen Dental, which has 600 practices across 36 states. Clinicians in Aspen branded practices made the decision to implement our new NUPRO Freedom Cordless Prophy Handpiece throughout their offices. They were one of the first groups to embrace the advantages of the product, which includes one-of-a-kind infection prevention, reduced noise and exceptional ergonomics for hygienists.

We have a solid foundation with group practices, but we have a significant opportunity to bring more value to current customers and to bring on new ones.

We will continue to focus more resources there and develop products that can better support our customers and differentiate us from the competition.

This fact was evident at the International Dental Show in March. We launched 50 new products and solutions at the show itself. At the show, we unveiled our new root to crown solution. As the market leader in imaging, endo and restorative products, DENTSPLY SIRONA can now provide an end-to-end integrated solution for root canals. This makes treatment better, safer and faster.

Dental professionals understand that enabling technologies are the key to providing integrated procedural solutions.

At the IDS, it was clear that digitization -- digital dentistry is happening today. And DENTSPLY SIRONA is best positioned to accelerate the benefits for this megatrend.

3D imaging and single-visit dentistry are both at the tipping point. With the launch of our low-dose mode for the ORTHOPHOS SL, we are another step closer to making 3D imaging the standard of care.

With lower radiation levels, we've made using our 3D imaging safer while still offering best-in-class X-ray quality.

For the first time at the IDS, we announced opening up CEREC systems to enable export of our STL files.

Without compromising the integrity of our unmatched chairside system, opening up the Omnicam will accelerate adoption of our product for digital impressions.

Many digital labs have gone from being opponents to -- digital to supporters. Digital impressions makes labs’ workflows more accurate and efficient and helps them better serve their customers.

By opening up the system, we have facilitated better coordination between dental labs and individual practitioners. Now as dentists go from impression materials to digital, our Omnicam represents the best choice in terms of quality, ease-of-use and effectiveness for both dentists and labs alike. And we still have the #1 selling impression material.

Awareness and acceptance is not only rising in professional community but among consumers as well. Single-visit dentistry is differentiating dentists to their patients who are beginning to ask for CEREC by name.

In May, we launched a direct-to-consumer promotional campaign in conjunction with 1-800-DENTIST to celebrate Disney's Pirates of the Caribbean, Dead Men Tell No Tales, to raise the profile of our technology and educate potential U.S. patients on the benefits of CEREC and single-visit dentistry.

We also ramped up our efforts to reach different demographics by appearing on well-known stations such as MSNBC, CNN and ESPN.

The other critical component to accelerating adoption is the partnership of our distributors. This morning, we announced a new go-to-market strategy in the U.S. The U.S. market is the largest in the world and critical to our long-term success. In September, Patterson and Henry Schein, the 2 largest distributors in the country, will have access to our full distribution product line.

Our consumables have been part of both Henry Schein and Patterson since the early days of dental distribution in the U.S. We have a unique and important relationship with Patterson, who has been an exclusive partner selling equipment and technology in the United States.

Together, we have been a driving force in the adoption of digital technologies, and our new agreement ensures that our companies continue driving penetration of digital technologies and solutions in this important market.

We're also excited to expand our relationship with Henry Schein and are confident that adding our equipment lines to their sales and service infrastructure should be complementary, as they already know us and our products well.

Schein can leverage knowledge and success they've had selling our technology in Europe. With both distributors carrying our full distributed product line, we will expand our reach into the U.S. market. Awareness about digital and single-visit dentistry will increase and expand the market.

With CEREC only 17% penetrated and 3D even less, there is significant room for growth with both Patterson and Henry Schein.

Equally important with both Patterson and Henry Schein, carrying our full distributed product line, we will be able to reach the majority of U.S. dental professionals with our end-to-end solutions. As they adopt our full solutions, we will grow faster. As our installed base increases, we will have even more opportunities to cross-sell our product portfolio.

A critical component to cross-selling is also integrating our products. Our leading treatment centers are now integrated with our endodontic and implantology systems, further differentiating our products.

DENTSPLY SIRONA treatment centers are truly the centerpiece of the dental office in critical hubs in our ecosystem. We had another record quarter before the IDS in Q1.

We also continue to have success selling our CELTRA Duo blocks and other CEREC consumables and -- to new users of our technology. This is rapidly growing multi-hundred million dollar market. This synergy opportunity is significant. We are ramping sales rapidly.

As one global team work -- as our one global team works hand in hand, we are seeing clear benefits. Where our commercial strategies are critical to driving growth, innovation will remain the hallmark of DENTSPLY SIRONA.

At the American Association of Endodontics Annual Meeting, we launched our new CEREC Ortho 1.2 software and the new self-ligating bracket system In-Ovation X. This is the first meaningful innovation of self-ligating brackets in many years and reduces both treatment time and professional chair time compared to the current standard of care in this category.

Our lab business has a slew of new products in the market. Materials like CELTRA Press and Cercon XT are driving momentum in the marketplace. We continue to invest in research and development as well as our sales and service infrastructure, with over 4,000 sales and service professionals around the globe, our reach is unparalleled in the industry.

Our merger is enabling us to make these investments as we generate cost savings. We have many multiple reorganizations and country formation projects in process. Our cost synergies programs remain on track and will ramp into 2018.

Top line growth remains at the forefront of our priorities and strategies, but we will also remain committed to driving leverage through our P&L and driving increased profitability. We anticipate earnings growth to accelerate in the second half of the year.

Finally, our capital allocation continues to be a key component of our strategy. With our strong balance sheet, we remain focused on our pipeline of deals and a disciplined approach. In addition to acquisitions, we intend to consistently return capital to shareholders via share repurchase and dividends.

I'd like to thank our customers for their loyal support, trust and enthusiasm for DENTSPLY SIRONA. We are pleased to announce our new agreements with Henry Schein and with Patterson today. We are truly excited about the possibility of growing together.

I'd also like to extend a special thanks to our employees. Integrating 2 companies can be difficult and many have been working tirelessly to make DENTSPLY SIRONA a success. Their commitment to improve the lives of dental professionals and their patients is inspiring.

We will now address your questions. Operator, please proceed.

(Operator Instructions) We will now take our first question from Brandon Couillard from Jefferies.

I guess Jeff, starting with the Henry Schein deal, can you speak to the importance or the somewhat earlier start date, being September 1? I was previously under the impression that the Patterson exclusivity would run through the end of September. And is there any relevancy to the 3-year period? And I guess, part two, maybe for Joshua, you seem to point to a slightly or a wider band for the inventory destocking headwind this year, $50 million to $60 million versus the prior $50 million. Can you just elaborate on the shift there?

Thank you, Brandon, important question. Of course, we're celebrating today the announcement of Henry Schein. As we stated on our call in February, the transition to opening up distribution has its challenges. And we made it clear that we were changing our go-to-market. And we felt, as an organization and working with Patterson, that this was the right time to be able to announce this. This is a significant decision for us. We also felt by doing this now, we were able to stay focused on our exclusivity with Patterson through the summer, but be able to bring Schein on for our September and our DS World as we move forward to the back half of our year. The significance of the 3 years is just an initial term for us. We expect to be doing business with our full distributed lines with Schein for years to come. We're very excited about how our teams have worked together as we've seen the success in Europe, and what we've been able to do on the distributed consumable side with Henry Schein. The time is now, ever since it was announced that we would be changing our strategy and opening it up, and to get the clarity in the marketplace were exactly what we're doing. In the absence of clarity, we have issues with our customers, we have issues with distribution reps and we have rumors, and frankly, we have our own people wondering what's going to happen. Now we have that clarity about how we're moving forward, and this is important. And certainly, we have confidence in our long-standing relationship with Patterson. On the technology side, certainly, it's been 20 years of exclusive with CEREC, which is very special to us. Henry Schein has had and continues to have a special relationship with us, has had exclusive and continues to have CEREC exclusive in many areas, and bringing it all together today allows us to move forward in a very powerful way, get the field to focus on the exclusives they have, to understand the way forward for us and to get down to what's most important, and that's taking care of the customer and executing on our plan, which is why we talked about the second half being where we expected to grow faster.

Brandon, this is Josh, just on the question about the band of inventory, I think, you're referring to what we said last quarter, when we talked about a $50 million net impact. Just to be clear on what I had mentioned, was that we expect a $50 million to $60 million impact going forward from here on out, with the bulk of that happening in Q2. The net impact of all of this should be $10 million to $20 million, the remainder of the year. I think, it's hard to pinpoint a specific number, obviously, because ultimately, inventory is a function of retail performance, and as Jeff alluded to, transition can cause some slowness there. But of course, clarity is important to help get that going again. So I think, from a modeling perspective, the way you should think about it is, $50 million to $60 million, bulk of that in Q2, and then like I said, remainder of the year, $10 million to $20 million, if there's a little bit more than $50 million, we think there are opportunities that we might be able to offset it with some other market channels. But again, we'll continue to keep you updated.

We'll take our next question from Jeff Johnson from -- of Robert W. Baird.

I guess 2 questions. The first one, just -- are there going to be any differences in how you support Patterson and Schein from maybe a sales and education perspective? Does that mean we need to think about margin profile of your business through Schein or Patterson as different at all between the 2 in the U.S? That's the first question. And then Josh, just on those inventory comments. I guess, I'm completely misunderstanding here, guidance as of last quarter was that we would see $40 million to $60 million of the inventory headwinds for the year. We saw, I believe, $40 million to $50 million in the first quarter, now you're saying there's another $50 million to $60 million -- where's the $50 million to $60 million all of the sudden coming from? That's a new number to me. So if you can help me out there, that would be great.

Okay. Jeff, Patterson has a 20-year experience with our product offering and infrastructure and training available today. We will work with Schein, we have a plan in place. We are not going to compromise our customers on their training and education of this, and that's why we are confident about bringing on those distributors, because of our ability to take care of the customer and expand our reach. We have a lot of confidence in Schein's capabilities to do -- Henry Schein's capability to do this. With regard to the margin profile, we are not going to get into the contracts that's been agreed to by both parties, but we are confident that this -- the way we've set up our structure benefits both Henry Schein and Patterson.

So Jeff, just -- again, go back on the inventory. We talked about a net number for the year last call. You saw an impact this quarter, and I talked about the $50 million to $60 million additional impact going forward, that will be bulk of it in Q2. Could leak into Q3 as well. And then of course, we talked about is a net number, which means we believe there's some offset opportunity from other channels coming online.

Jeff, I think, it's important to understand that what we're talking about at the end of the day is $50 million to $60 million. We absolutely believe that as other channels come online, there will be a net effect. So we have not changed from that perspective. And we certainly also believe that there are global implications of this and opportunities for us.

Our next question comes from Tycho Peterson from JPMorgan.

A couple. First, was there any -- I mean, if we look -- Technologies were still down just under 4% after adjusting for Patterson. Can you maybe just talk about how much of that was a pre-IDS slowdown? I think Schein, this morning, talked about 197 deduction point forward sales in the year-end. So is there any impact there or is this also just a function of Patterson reps maybe losing a little bit more of focus.

Well, I think, certainly, that played a role in this, that's why we wanted to get the clarity out there to the field exactly what was going on. There were too many rumors that we're stalling sales, and that was critical to what was important there. And certainly, ahead of the IDS, it always stalls sales as they look to see what we're going to bring out. Now on our last call, we talked about announcing 50 new products and technology, and that certainly played a role for us. We were pleased, though, with what we were seeing, particularly in Germany and Southern Europe, but there was, in general, slowdown, and this doesn't just affect Europe, but this affects other parts of the world as they are looking to find out what exactly is DENTSPLY SIRONA. But I would also highlight that our consumables showed consecutive sequential growth in Europe ahead of this. There was no delays there. We feel good about what that tells us. What we're able to do in the marketplace. But it is a function of -- this was our first IDS together. The marketplace wanted to see what's DENTSPLY SIRONA really about. Frankly, yes, we've been together for a year, but the IDS is such a big showcase. And to be able to see the order intake and reach records for all of our product areas and segments. And in fact, CAD/CAM benefit and specifically, CEREC, clear double digits from us coming together. As we've always said, as DENTSPLY SIRONA we believe we'll accelerate the adoption of our technologies.

And then just one follow-up on CEREC dynamics. Obviously, we saw Schein do the deal with (inaudible) as well. Can you just maybe talk on some of the shifting pieces you're seeing in the market on competitive dynamics, in general for CAD/CAM? And maybe the post-IDS reception to you guys opening up CEREC.

Sure. In a moment, I'm going to pass the call to Chris. This highlights what we've been saying to the market for years. The market is going digital. Single-visit dentistry matters to the dental professional and the patient. You cannot ignore that, whether you're a materials company or an equipment company. And I would argue every dental company understands the impact that this megatrend is having. And of course, this IDS showcased the fact that DENTSPLY SIRONA is in the best position, but of course, we're going to have competitors come on to try to play a role in this. As we've said, we are only 17% penetrated in the U.S. Imagine what it is around the rest of the globe. With that, I'll turn it to Chris.

Yes, Tycho, it's Chris. I think this is the case when you're successful in a market, it's going to attract attention. I think, it's what we have here. As Jeff mentioned, digital dentistry is here to stay. We're at the tipping point. From a competitive standpoint, more attention to the category is going to drive more interest, and that's going to accelerate penetration and we think that's good for us. Obviously, we've had a good healthy respect for our competition. We're staying close to technological developments, but that said, we are also very pleased with our technology platform that comes from over 20 years of experience, and continuously leading both an innovation and also in market in sight. So again, we are the clear leader here. We are the basis for doctors being able to perform single-visit dentistry, we are pleased with the near-term innovations, including CEREC Open and the new software that Jeff mentioned earlier, and we're continuing to make significant investments in our R&D portfolio to stay on the forefront of technology. So again, we are pleased with our position, and again, I think that overall, more attention on the category is going to be helpful to accelerating penetration.

Certainly, 30 years’ experience, R&D, know-how and the team we have in place, with not only equipment, but materials today is even stronger for the future for our CEREC.

(Operator Instructions) We'll take our next question from Mr. Steve Beuchaw from Morgan Stanley.

I want to just follow up in a specific way on the Rest of World piece, and then, just a couple of clarifications. On Rest of World, the result was a little bit below our model. I wonder if you can reflect and I guess, it doesn't necessarily have to be specific to Rest of World, on the timing of the IDS, if you look at the last few iterations of the IDS, it was middle of the month, so you had a couple of weeks in there to complete deliveries. Did the timing of the IDS being close to the end of March, the end of the quarter have any impact? And then I have a follow-up.

Steve, it's tough to say how much timing of the IDS would play, but keep in mind that we had a difficult comp coming in, 7.5% last year and after finishing the year strong. We still believe that the Rest of World will be our fastest growing region. That hasn't changed. We've got 120 countries in the Rest of World. Asia was slower than we expected. But we expect that, that will improve in the second quarter and make up for the slowness on that. We were pleased what we saw in Latin America, growth, even given the restructuring efforts there. So we expect that the Rest of World will play a critical role in the future. I think, clarifying that we're -- how we are going forward in Canada, that plays a role in Rest of World and our North America will support that, and that had an impact. But in general, the offering we have in Rest of World, we expect to continue to generate sales in the back half of the year.

I just want to follow up on Jeff's question actually about equipment trends. I mean, given what you've seen in the DTA data, the consolidated industry data on equipment trends in the U.S. through the first quarter, how are you thinking about the equipment demand profile, not necessarily in a DENTSPLY SIRONA specific way, but the trajectory for equipment demand in the U.S?

Yes. Steve, it's Chris. First off, in terms of DTA data, there's no longer any DTA data on large equipment available. So from that standpoint, again, some of the market data that may have been available is no longer. That said, as we look at it, it's a little bit tough for us in terms of a barometer for the factors that Jeff mentioned, obviously, with the go-to-market strategy change. But in the quarter, not announcing the clarity in terms of exactly what that is, we do think it had an impact on us. As we look at it, we do think that underlying demand is solid and stable. But it was probably not the quarter for to use us as the barometer for that.

And again, today, we announced a major change in our go-to-market in the U.S. And this is one that is going to have a short- and long-term impact with DENTSPLY SIRONA, and we need to focus on how important that will affect our equipment sales with both in place and our ability for Patterson to finish strong before September. Keep in mind that as we go into DS World, we'll now have a new message to the marketplace about what's possible for them. And this should make it easier for the reps to be able to sell the product and the adoption to increase.

Our next question comes from John Kreger from William Blair.

Jeff, just expand a little bit on the comment you made in the call about, feeling like you're under penetrated in the group practices, I think that was mainly a U.S. comment. Is your go-to-market strategy changing beyond adding Schein? If you could just expand on how you're going to push more into DSOs, that would be helpful.

Well, look, first of all, I think, we have a strong practice in the DSOs. Keep in mind, we go through distribution and direct with our specialty products. That won't change. But we're aggressively going after DSOs by bringing together how we present ourselves with the DSO to make sure they get the full benefit of our clinical education, our 360 programs and have integrated solutions deal with the full facets of what we're able to provide, root to crown, Class II procedures, implantology. By being able to focus that, we believe we'll have more of an impact in the DSOs. So there's a lot of opportunity for us, because we want to not only improve our share of wallet, but increase the number of DSOs that we're working with. We are already working with most of the largest DSOs. So it is about putting our organization together, investing in those resources and being able to make sure that the focus is on an area that's growing faster than the market.

Our next question comes from Robert Jones from Goldman Sachs.

Just wanted to go back to the softer equipment number. The inventory wind down does seem to be a bit of a moving target. So I'm just curious, at this point how much confidence do you feel like you have in this revised number? Is that something that you've worked more closely with Patterson to get your hands around? And then just related to that, Jeff, I believe you mentioned a weaker retail performance in your prepared remarks, particularly in the U.S., as something that was a headwind or a drag. Could you just maybe elaborate a little bit on what you meant by retail performance and how that's separate from the inventory issue that we've discussed?

Sure. Again, I think that comes back to the clarity of what's happening in the market. Bob, I can't tell you how many reps are hearing that we're imminent to opening up distribution, the distractions that, that has had, which has created uncertainty and uncertainty is never good for a rep, for an organization. And that had impact in what we were able to sell. I think, with this clarity and the fact with our confidence with Patterson and what we've been able to do over the last 20 years with the exclusivity, we can get back to doing what we want to focus on, which is executing and selling the product. You also have to keep in mind that last year, we introduced a new way of thinking about chairside, with using Zirconia. We came out with the Speed-Fire, which also led to changes in our billing unit, [wet dry]. Those also had impacts for the prior year on this.

Bob, with regards to inventory -- this is Josh. Just to provide clarity, so recognize there was a $40 million change year-over-year, related to inventory, that was Q1, right? We talked about an additional $50 million to $60 million coming, right? But for the net -- for the remainder of the year, a net of $10 million to $20 million, which is to say that there's going to be an offset to that. So we -- what we've said is, last call, we talked about $50 million, we're talking about a similar range here. Again, ultimately retail, it will dictate how much or how little this will be, but we're still in the general range as we are talking about. So it's -- it's never a perfect target, but I don't want to give you the impression that it's a moving target. It's still within the same range. It's just a function of -- remember, we talked about this being a tale of 2 halves in terms of the year. We talked about the first half having a significant headwind in inventory. We talked about strong growth in the back half of the year, right? We reiterated our guidance, and so we're just reiterating that same message. We obviously had the first impact in Q1, you'll continue to see impact in Q2, and you'll get the benefit of the other market or the channels coming online, which will offset that headwind in the back half of the year, which will drive our growth. So the net is in the same realm, right? Again, we can't pinpoint it exactly, but I don't want you to walk away thinking there's a significant change here, because there isn't.

There really isn't again, the big picture is about the net result for the year. And we haven't changed that -- we've said the first quarter was going to be challenged, and actually, it would also be the first half, and it was all about the second half. So I want to be clear that we continue to be on track believing that what we gave the guidance, and that's why we haven't changed our guidance.

Our next question comes from Jon Block from Stifel.

I'll try to ask both upfront. So first one, Jeff, just your thoughts on capital allocation and possibly getting more aggressive on the share repo. It seems like you're sensing or seeing worldwide dental market picking up, you got broader distribution going forward. You called out several times, you expect momentum to increase in the back half of the year and to sort of continue into '18 and you're sitting here on a very solid balance sheet. So just your thoughts on maybe flexing the balance sheet a bit more here in the near term. And then the second question, just quickly is, a lot of moving parts for 2Q, I mean, you guys have hit on inventory but you also have sort of the ship outs going on from IDS. So curious if you want to give any clarity on the EPS cadence on line and just how to think about the moving part for the remainder of the year.

We have a clear buyback in place. We've already deployed over $1 billion in capital, in acquisitions and buyback. We continue to do that. That's an important lever. We have a very strong balance sheet, which we will continue to use. So I don't see that changing. Certainly, that's part of what we've talked about. We also said that we're going to do $50 million to $100 million per quarter. We did $85 million this quarter. So we're staying on track with what we believe. With regards to the EPS, clearly, we don't get into quarterly guidance, but the back half assumes and we expect to have acceleration on that.

Our next question comes from Steven Valiquette from Bank of America.

So I know you guys can't talk too much about the terms of these new U.S. distribution deals, but I guess my first simple question is, will the U.S. sale of CEREC through Schein be more profitable to you than what CEREC unit profit margin has been under Patterson, previously? Then also is Schein going to sell just CEREC in the U.S. for chairside CAD/CAM crown restoration or are they still going to have the option to sell other chairside crown restoration systems if they want to?

Again, this is about Schein having our full distributed line. They'll have everything, with regard to CAD/CAM as well as our imaging products, our treatment centers and our instruments. We're not going to get into margin profile. Obviously, we believe that this structure is in the best interest of both parties, and it's about accelerating growth for both of us.

Okay. Yes, the other quick thing. This is more of a comment then really just a question. But I still didn't getting the notion of the Patterson's sales force distraction. If they know they're still going to be selling it going forward, you’d think they'd want to work harder to lock in sales before a new distributor comes in. I don't understand why they weigh down in this situation but again a sort of sidebar comment, I guess I'll look forward to seeing you guys at our conference next week and we can hopefully talk about this in more detail.

Look, again, until you have clarity in a market, it leads to confusion. And you have to understand that, that is a fact. When we -- when Patterson on their call, in November, announced that they would be opening up distribution with it, that brought certain uncertainty to the marketplace. We feel we've dealt with that. I mean, we are very excited with what we've announced today with Patterson as well, and we think that will have an impact for us. So both Henry Schein and Patterson, coming together, understanding what is going to be exactly what we do moving forward will allow everyone to focus on execution.

Our final question comes from Matt Miksic from UBS.

This is Vik Chopra in for Matt. I just wanted to ask a quick question on the consumables business, kind of what areas of strength you've seen, maybe specialty versus general products. And what you're seeing in terms of ASPs. And my second question is on gross margins, how should we think about gross margins heading into the rest of year? And can we expect an expansion over last year?

Vik, it's Chris. Relative to the consumables, we had pretty solid and consistent growth really across the various SBUs, if you will, both on the chairside as well as on the specialties, particularly solid relative to endo. Again, we looked at -- we look at pretty solid underlying U.S. sell-through trends, which, again, we're pleased with. Europe was we are very solid from a consumables -- core consumable standpoint. So again, I think that we feel good about how that business is executing. There's a number of new innovations that we showed at the IDS. New products really does drive that business -- those businesses pretty significantly, which again, we're pleased with what we've brought to market and again, I think, that relative to the margins or the pricing, again, we're able to hold price fine. We are able to take reasonable price, generally on this business. So again, I don't think we see any significant change in those competitive dynamics.

Vik, as far as gross margin for the year, we don't get into that level of detail. What I would tell you is that, this quarter, margins were impacted by the timing of the merger last year. Remember, last year had the strongest selling month for Sirona, so that gave us a difficult comparison. We talked about margins year-over-year in terms of operating margins to be similar to last year, but that actually implies underlying growth, because again, you'll recall that last year, we benefited from that strong selling month. So overall, remember, gross margins, you have a lot of moving parts in there between product mix and FX. And so we'll just talk about the operating margin level for the year.

That does conclude today's question-and-answer session. I'd like to turn the call back over to our moderators for any additional or closing remarks.

Well thank you, everyone, for joining us today on today's conference call, and thanks for your interest in DENTSPLY SIRONA. We look forward to seeing many of you at the upcoming conferences and of course, we'll update you again in August. Have a good day.

Thank you. That does conclude today's conference. We appreciate your participation, and you may now disconnect.