DENTSPLY SIRONA Inc (XRAY) 2018 Q1 法說會逐字稿

Good day, and welcome to the DENTSPLY SIRONA First Quarter 2018 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Joshua Zable, Vice President, Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to our first quarter 2018 conference call. I'd like to remind you that an earnings press release is available on our website at www.dentsplysirona.com.

Before we begin, please take a moment to read the forward-looking statement on our earnings press release. During today's conference call, we'll make certain predictive statements that reflect our current views about our future performance and financial results. We based these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K and Form 10-Q list 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 Don Casey, Chief Executive Officer of DENTSPLY SIRONA.

Thanks, Josh, and good morning. We appreciate everyone joining us today. It's been an important quarter for me as I continue to meet with our critical customers, KOLs, practitioners, and most importantly, our thousands of dedicated employees around the world. Throughout all of these conversations, I'm reminded that this is a great category, and we are well positioned in it.

We have powerful brands, important technology and a truly global footprint. Our view and those of our critical stakeholders is that the basic fundamentals of the category remain positive, that there is a healthy underlying demand for dental products and innovation is rewarded. And new technologies, many of which are ours, are really advancing the profession. It is clear that we also need to move our focus from putting 2 great companies together and begin to focus much more on the customer and how we deliver on our role as being The Dental Solutions Company.

One of the final critical observations from the past 3 months is that the market is evolving, particularly in the U.S. It is very clear that DENTSPLY SIRONA will need to adopt (sic) [adapt] to these conditions in order to consistently grow faster than the market. This is highlighted by results in the quarter. In Q1, we saw solid performance in many regions and businesses, weighed down by significant headwinds in the U.S. Technologies & Equipment businesses.

On our first quarter call, we said that we will judge our success by our ability to return the company to reliable top line growth and improve our margins, that our growth program would be built around 3 areas: improving our sales force effectiveness, delivering our innovation agenda and focusing on growth in the countries and regions that are seeing rapid economic development. During this quarter, significant progress was made on these priorities, but they are not quick fixes.

We also indicated that a prerequisite to growth would be improving the performance of our Technologies and Equipment business in the U.S. To deliver against that objective, we have developed and are investing in strategies and programs designed to help us own the responsibility for demand creation. Comprehensive in nature, these efforts will augment those of our valued dealer partners. Highlights of the program include stronger marketing and communication programs and a commitment to hiring 50 additional reps beginning in the second quarter. This program will also include aggressive supplemental selling efforts that will involve multiple parts of the DENTSPLY SIRONA field organization as well as some other dealer-initiated programs. It is designed to reinforce the powerful potential of these products and help our dealers accelerate sales. Based on what we have seen around the world, these products have a lot of runway in front of them. They deliver remarkable patient and dental satisfaction, and we expect them to be a strong source of growth in the future.

Beyond this, our general sales force effectiveness program continues to highlight the significant upside that exists across the entire business. We are in the process of assessing and augmenting the skills, capabilities and performance of our over 4,000 salespeople globally by rolling out programs like salesforce.com as well as other tools, including clinical and product training, as part of a broader program designed to improve our go-to-market capabilities to deliver consistent above-market growth going forward.

A key differentiator for DENTSPLY SIRONA is our commitment to clinical education. While some talk about it, we deliver it. Later this month, we will open a state-of-the-art training center in Charlotte, North Carolina, that will help us reach over 10,000 dental professionals per year. Between this and our European center in Bentheim, Germany and over a dozen satellite facilities around the world, we will directly touch over 25,000 practitioners a year, supplementing our continuing education efforts that reach over hundreds of thousands of dentists annually. We look forward to welcoming you to our new Dental Academy for an Investor Day on September 27 so you can see this impressive facility firsthand.

The second part of our growth initiative for improving our top line will be innovation. We spend over $150 million annually in R&D and believe that we have a very robust pipeline. Our leadership team is spending a considerable amount of time with the teams to make sure that we are accelerating major innovations that can drive share and margin. Our efforts also go beyond internal development and include acquisitions. As you saw, we closed on the OraMetrix transaction last week, and we are really excited about this acquisition. This is much more than a clear aligner program. It combines a comprehensive software and manufacturing platform that can create real root-to-crown treatment options for the dentist. OraMetrix uniquely integrates digital scanning, 2 and 3D x-rays to commute -- to create customized, individual treatment plans for orthodontic patients. The software can plan cases using brackets and wires as well as clear aligners to offer the clinician flexible and broad range of treatment options.

This past weekend at the American Association of Orthodontists, DENTSPLY SIRONA launched a full clear aligner and the integration of the OraMetrix and Omnicam. The reception was very positive and shows the power of DENTSPLY SIRONA equipment, software and clinical education offerings. Across our entire portfolio, we expect to launch over 30 major products this year and expect to be very competitive at the Key Idea show in March of next year.

Finally, we've said that we want to grow in the growing markets. It is important to note in this most recent quarter, critical markets in Europe and Asia saw solid growth in this past quarter. We expect that growth to not only continue, but to pick up throughout this year. We believe we have the right products, a solid commercial footprint and will make the investments necessary to build sustainable growth. Examples of these investments are represented in robust clinical education and creating meaningful training facilities in places like Vietnam and Indonesia or expanding our selling organizations in high-potential markets.

As I stated on our last call, in addition to growth, the second area that's important to me is improving our margins. There are several ways to do this, and one of the most critical is cost initiatives. Our entire leadership team is committed to the goal of saving $100 million by 2019, and we feel good about the progress we have made there. It's not all translated into operating margin expansion this year as we are looking to make investments like OraMetrix and our equipment program to accelerate our Technology and Equipment businesses.

As the company continues to address the need for additional capabilities, we want to have the flexibility to make those types of decisions. Going forward, though, we expect to deliver savings in areas where we can operate at scale and improve our competitiveness and cost positions. Whether it's procurement, manufacturing, logistics or other areas of SG&A, the team here is very focused on taking full advantage of our scale. And we have made significant moves in this area that will begin showing up in 2019. I will let Nick take us through some of those key initiatives a little bit later.

The final commitment I discussed in that first call was a desire of this management team to be transparent and accountable. As you saw in the press release yesterday, we are adjusting our guidance to reflect what we saw in the first quarter, and more importantly, outline the investments and actions we are taking to return us to growth. Our updated range reflects our full year expectations and provides us the flexibility to make the tough decisions that will help us build a solid foundation for future growth. It is also important to note that our Board of Directors increased our share buyback authorization by $500 million, bringing our total authorization to $1 billion. This underscores our commitment to our shareholders. As we go forward, I am truly grateful to our tremendous employee base and their unswerving commitment to our company. It is their passion and desire to win that makes me believe that we will return this company to sustainable growth going forward.

Now I'd like to turn the call over to our CFO, Nick Alexos, who will provide a more detailed look into our results and our underlying assumptions for our 2018 outlook. Nick?

Thanks, Don, and good morning, everyone. I want to echo Don's remarks about the range of opportunities and the progress we're making.

For the first quarter, constant currency total sales decreased 1.1%, driven by Technologies & Equipment, which declined by 1.7%. The Technologies & Equipment segment was impacted by approximately $8 million of dealer inventory reductions in the quarter, and we continue to target $40 million of such reductions in 2018. Consumables declined slightly this quarter, driven by a shortfall in the U.S. We believe that the consumables grew at a better market rate in Europe and the Rest of World. Regionally, the U.S. was down 7.4%, driven by declines in Technologies & Equipment. Consumables in the U.S. declined as they were impacted by a number of factors. We have some orders pulled forward in Q4 of 2017 and had a strong year-over-year comparable in our instrument business. We have seen improvement in sales in the recent months and are confident in our rest of year growth rate. We continue to view the U.S. dental market as stable, and we expect the initiatives that Don spoke about will improve our performance in the rest of 2018 and provide momentum for 2019.

In Europe, our low sales growth was impacted by Consumables, which had a difficult comparable due to the timing of the Easter holiday this year. In Europe, the Technologies & Equipment business faced a difficult comparison due to last year's IDS results and a slight impact by the dealer inventory reductions in that geography. We are seeing solid demand for our Technology & Equipment products in Europe.

In Rest of World, constant currency growth rate of 5.3% was driven by both Consumables and Technology & Equipment performance. We believe this reflects the exceptional strength of our products, brands, clinical education and direct sales and marketing efforts. As Don mentioned, driving growth in the developing geographic markets is a priority. We are confident our overall sales performance will improve sequentially as we move through the year, but we have reduced our revenue forecast to reflect the near-term underperformance of the U.S. Technologies & Equipment business. We expect growth in both Europe and the rest of the world, as I mentioned, to continue.

Turning to margins for the quarter. Adjusted non-GAAP operating margin declined to 14.5% versus 16.6% a year ago as lower sales worked against our fixed costs and product mix weighed negatively on margins. Also, as we mentioned on our last call, we're seeing some foreign exchange headwinds due to our non-dollar-based costs. We are not seeing any significant change in our overall pricing environment, however. As Don mentioned, we are on track for a cost savings, which will ramp up throughout the year. We plan to see margin benefits in 2019.

Q1 adjusted EPS was $0.45. Cash flow from operating activities was $55.2 million, down 33% versus prior year, which was impacted by the Q1 operating results and an increase in our own inventories. We are aiming to reduce our current inventory levels by at least $30 million by the end of the year. As we've said, operating cash flow is an important indicator of the health of the business and the area we can improve. CapEx was $35.8 million for the quarter, up from last year's $31.1 million. We continue to expect that CapEx for the year will be similar to 2017, and we will monitor our spend to ensure that we are delivering appropriate returns.

On May 1, as you've seen, we closed on the acquisition of OraMetrix for $90 million in cash with an additional potential earn-out payments of $60 million. We expect to hit the milestones and pay the earn-outs in 2018 or by early 2019. During the quarter, we were unable to repurchase any of our shares. The filing of our 10-K coincided with the blackout period. As Don mentioned, we have increased our share buyback authorization to reflect our commitment to returning dollars to shareholders.

Now turning to guidance. Our guidance includes the following assumptions: full year constant currency sales growth is now at 2%, which reflects the lower Q1 results and implies around a 2.5% internal growth rate for the remainder of the year plus about $20 million of revenue from OraMetrix. At the current exchange rate, this translates to approximately reported revenues in the range of $4.2 billion.

As I mentioned, our revenue assumptions assume the $40 million targeted reduction in dealer equipment inventory, which is costing us about a 1% internal growth rate, and we are on track to reduce most of that in the first half of 2018. Please note that given that the targeted dealer inventory reductions in the first half will have an impact on our Q2 results, and therefore, Q2 will be at a lower internal growth rate than the full year amount.

We expect 2018 full year operating margins to be down between 100 and 150 basis points versus last year, which is net of the targeted cost reductions that we will achieve. This is a function of FX headwinds in our costs, higher operating costs on lower sales and higher investment spending related to the growth initiatives in the rest of the year. As Don mentioned earlier, we are committed to delivering the $100 million in operating cost savings by fiscal year-end 2019, and we're on track to realize $50 million of actual savings this year.

I'd like to take a minute to put some context around our cost-savings effort and provide some details. During the first quarter of this year, we successfully closed our dental handpiece manufacturing operations in Des Plaines, Illinois. The production was moved to our much larger handpiece manufacturing operation in Bentheim, Germany to leverage existing infrastructure and more advanced production technology. In Q3 of this year, we will complete the consolidation of our German distribution facilities into our European distribution hub in Venlo, the Netherlands. This is yet another project that will drive savings beginning in 2019.

We've also been consolidating into our distribution center here in Lancaster, Pennsylvania. These initiatives are in line with our strategy to streamline our global distribution network and our supply chain. These are just a few examples of projects that will improve the operations of the business and drive cost savings. Given the sensitive nature of some of our additional projects, we will continuously update you on them as they are implemented.

On taxes, our non-GAAP effective tax rate for Q1 is 21.4%, a slight improvement from the targeted 22% we initially expected. As we stated on our last call, this rate is based on the changes in the U.S. tax legislation, which reduced our foreign tax credits and limit our abilities to defer foreign tax income. Please note, only 30% of our revenues are from the U.S. Lastly, our guidance does reflect the use of excess cash in 2018 to buy back stock. Based on timing of these purchases, we may incur limited interest expense that would partially offset some of the EPS accretion in 2018.

There are clearly many variables to our EPS guidance throughout the income statement, which we manage. As a result of these variables, we revised our guidance of our non-GAAP EPS to a range of $2.55 to $2.65 from the previous range of $2.70 to $2.80. This compares to the $2.66 realized in 2017, which had the benefit of a lower effective tax rate.

The primary drivers of the $0.15 difference in the revised guidance at the midpoint are as follows: the acquisition of OraMetrix and subsequent operating expenses to grow that business will cost us about $0.03 to $0.04 of dilution to the adjusted EPS; our lower sales outlook and newly identified OpEx investment, net of cost reductions, will impact our adjusted EPS by approximately $0.11 to $0.13. Offsetting these is a slightly better tax rate that should add about $0.02. Overall, although we are disappointed to not have foreseen the shortfalls in Q1, we are seeing good progress on our sales strategies and costs initiatives, and our guidance reflects these key decisions.

I will now turn the call over to Don for some final remarks.

Thanks, Nick. I want to end by reiterating that we understand the importance of our credibility with our investors and take this very seriously.

As we looked at the first quarter results and the action we wanted to take, we made a decision to invest in the long-term value creation. This business is stable, but has been stuck in neutral for 2 years. To reignite growth, we are taking the necessary actions, even though they will weigh on this year's results. We would expect to exit the year with a normalized run rate of growth with opportunities to accelerate the top line growth next year. We will leverage our cost savings going forward to drive margin expansion and faster earnings growth. These actions will enable long-term sustainable top and bottom line growth, which will show create significant value for our shareholders. We expect to see improvement as early as next quarter and promise to update you on our progress as we move throughout the year. We will provide more details on our long-term plans at the Analyst Day in September. We're eager to host you at our new Charlotte training facility to help make some of the investment tangible for you, and we encourage all of you to join us.

Before closing, I want to underscore our team's optimism about our future. This is a strong company that is well positioned. We are taking important steps today that will enhance our growth for years to come.

I'll now turn the call over to the operator for questions. Operator?

(Operator Instructions) And our first question comes from Steve Beuchaw with Morgan Stanley.

What I'd like to do is, to the extent that I can, make sure I have a little depth of understanding of how you see the hardware lines, particularly in digital, playing out over the next year or 2. So it's a 2-parter. One for Don. You proactively addressed IDS 2019. As you look at IDS 2019, those of us who covered Sirona for a long time will think back to the days of Omnicam launches and the SL, and it's been a few years, are those reasonable predicates to think about the scale of the opportunities you see for IDS 2019? And then just a housekeeping item, also related to hardware, for Nick. Is it fair to say that now that we're 5 months into the year and you've reiterated expectations for the $40 million, that your confidence in the $40 million is going higher, not lower?

Yes, I'll go first. Thanks for the question, Steve. Look, obviously, in the Technologies & Equipment business, it's important that we play our cards very closer to the vest. Otherwise, you wind up seeing sales deteriorate as you get closer and closer to IDS. I would tell you that the vast amount of time we're spending in our R&D efforts right now are really focused on digital dentistry. We continue to think there's a lot of runway there. We recognize that our products need to be updated, not only the products from a hardware perspective, but also software and its ability to connect with the dentist as well as some of the practice management systems. So we're focusing on making sure that, a, we've got good hardware; b, that our software is really updated; and then, c, that it's connected and works well in all the workflows around the world. So without trying to tip our hand, we're pretty comfortable that we've got a robust portfolio. We think we'll be very competitive at IDS, but we also want to be careful about -- basically, postponing any sales between now and then.

Steve, on the $40 million. The answer is, yes, we feel very confident that's a number that we can largely manage. It's an important number not only for us, but for our dealer-partners. And as I stated, we expect most of that to be realized through the end of Q2.

(Operator Instructions) We'll take our next question from Jeff Johnson with Baird.

A couple questions here. Maybe, I guess, just one question. Nick, I did not hear a U.S. Technology number. Simple math would have it down in the double digits, just can you confirm or give any color there? But more importantly, Don, on that point, can you bucket for us, and I think I've asked you this before, but just kind of as technology declines in the double digits in the U.S., how much of that is just the disruptions that's out there in your dealer channel? How much out -- is out there of just kind of end markets? Where they at in the U.S. growing or not growing? And then how much might be a structural shift? As some dentists move away from CAD/CAM or maybe more hesitant on CAD/CAM today because of growing popularity of DI. Do you have the right product there? And how much is that more so than even the dealer disruption impact in the U.S. number?

Jeff, it's Nick. Quickly, as you know, we don't give by-geography, by-segment growth rates. But I think you can get a sense that the preponderance of our disappointment is in the U.S. Technology business. Therefore, it performed less than the Consumable business, which is why we're doing some of the things that Don talked about.

Yes. And Jeff, that's a complex question, and you've been consistent in asking it. So let me try and break it down. I mean, obviously, the most significant change in our go-to-market strategy over the last 2 years has been going from our proprietary relationship with one dealer into the fact that there are multiple dealers that now carry our equipment in North America. And there's obviously been transitions that -- at those dealers. Look, long term, we feel very good about what the dealers are doing. We feel they're integral to our go-to-market strategy and provide real value to us, and we're going to continue to work with them. That being said, a lot of our conversations with the dealers, and obviously, we talk to these guys a lot, has been they really would like us to prime the pump a little bit more. And you can see the programs we're putting into place are really designed, in my opinion, to go and create more awareness, more demand creation because I disagree with you a little bit that people are moving away from CAD/CAM. I actually -- we've done a lot of work with dentists that have this product. They think it's terrific and are highly satisfied. What we need to do is convince more dentists that the benefits to the patient in terms of one-visit dentistry as well as the absolute great product they get when it's actually personalized -- personally developed for them right there at the dentist chairside is a great outcome. We need to convince more dentists that, that is a viable opportunity, and it's one that's not only going to be important for their future growth, but also delivers real value. When you mentioned DI, look, I think our DI strategy has been weak, to be honest with you. We have now spent a fair amount of time putting together what we believe is a very competitive program that we're in the process of launching. As a matter of fact, at the AAO show this last weekend, you're beginning to see stuff like OraMetrix, where we're beginning to use Omnicam as a DI device that will help with OraMetrix. So we believe that our product is terrific. We need to actually go represent that it could be the beginning of a journey to chairside dentistry, so start with Omnicam and move up. And I don't think we've done enough to support that. I think we will be doing a lot more as we go forward. But ultimately, what we -- and we get asked this a lot, what we see around the world where there's still higher penetrations of CAD/CAM than what we see in the U.S. is we believe it's up to us to create demand and make this product more relevant and prime the pump.

And we'll take our next question from Tycho Peterson with JPMorgan.

Want to ask on Consumables. I think people are expecting the technology to decline, but consumables were soft. You highlighted the order pull-forward in the fourth quarter and the difficult comp. But just curious, can you talk a little bit more about how you're feeling on consumables exiting the quarter? And have your assumptions changed for the remainder of the year on Consumables? And then just stepping back, you are -- you did okay against lowered numbers on the quarter and you haven't changed your destocking assumptions. So can you maybe just talk a little bit about what did change in guidance for the remainder of the year?

Yes. So Tycho, on the first point, I'd say, overall, we're seeing very good signs on Consumables and really view the comparative percentage more as a result of the pull forward and just the year-over-year comparables, as we noted a little bit on the instrument side. So overall, we feel pretty good. We're not seeing any real concerns in the recent period. In terms of the dealer reduction, that is our target. We feel that's a good number, and we think that, on top of that, we'll be able to achieve better performance in the Technology & Equipment business globally as well as, hopefully, in the U.S. during the rest of the year. So we're not changing our dealer inventory target number.

And we'll take our next question from Brandon Couillard with Jefferies.

I guess, following up a little bit on that question on Consumables. Any color you can give us sort of by product line, give us a sense of how implants has continued to perform in particular and perhaps an update on where the sales force is today as so far as cross-selling or their ability to score wins from selling workflow solutions?

Yes, thanks, Brandon, for the questions. First, what we're seeing in Consumables, obviously, we don't break out the lines. We've mentioned a couple of times that there was a comp on the instrument business related to the CDC proclamation last year about how to deal with infection prevention. So that's the first point. Second point, on implants. We're starting to see signs of life in our implant business. We expect that we're going to be announcing a sequence of leadership changes in the not-too-distant future as the leader of that business retires. And we believe that we've lined up a very effective leadership team. We just made a change in the U.S. that we think is essential to begin to propel that business going forward. So right now, with the implant business, again, we feel that we've got a pretty good lineup of products. I don't think we've done a particularly good job on delivering our message and capitalizing on all that we have to offer. You bring up, perhaps, the most important point in my mind at the end there in terms of how are we doing in cross-selling. It is interesting, when we begin to see stuff like OraMetrix and Omnicam, when we begin to talk about our implant business, with some of the DI products that we actually have, we get very, very excited about it. And we've seen in different parts of the world pockets where this works well. What we haven't been able to do, and when we talk about sales force effectiveness, is how do we institutionalize that and make it systemic. How do we make sure that everyone in our Endo sales force is conscious of what equipment is used in that doctor's office. And as such, when we talk about this idea of sales force effectiveness, one of the key pillars of that is how do we cross-sell. So I would say that we are at a very, very early stage. But one of the great promises of putting DENTSPLY with Sirona is the idea that we will have a complete portfolio that we will be able to talk to the dentists across a number of different procedures. And it's up to us to actually deliver a sales force that can help that dentist think about a procedure, think about how it works into their workflow. And we can do that uniquely because we're going to be bringing them a full portfolio of products that our reps can talk about. So I would say we are seeing signs that this is a very positive development around the world. We need to institutionalize that, and that's a critical priority in our sales force effectiveness program.

And our next question comes from Steven Valiquette with Barclays.

A couple for us. I think, first, I think, Nick, in your prepared comments, I think this was in relation to equipment sales, I think you made a comment about there were better trends in more recent months. I was wondering if, maybe, you can just expand and give a little more color on what you were seeing in that regard.

Well, specifically, exactly that, Steve. We have seen better trends in recent months. As a matter of fact, I was at the AAO this weekend. And just as Don mentioned, I think people are seeing the value of our Omnicam unit in the DI setting, and we're seeing good momentum on our broader chairside business as well. So exactly that, Steve.

And we'll take our next question from Robert Jones with Goldman Sachs.

This is Nathan Rich on for Bob this morning. Don, you talked about bringing on the 50 additional sales reps, I think, largely, on the equipment side in 2Q. Now given that you do sell through distribution partners in the U.S. as well as a number of other markets, can you talk about what the opportunities are for your reps to kind of come on and have an impact on sell rates on the equipment side? And how do you expect them to complement the selling efforts going on at your distribution partners?

Yes. Thanks, Nathan. Look, when we think about the Technology & Equipment business, you have to go through a couple of phases where there's obviously awareness -- create awareness and interest in the products. Then there's a qualification. Then qualification, you usually need a demonstration to get people excited about what the product can do and how it would work in their office. And then, basically, you need to close them. The program we're putting together is, I think -- we're trying to identify ways that we prime the pump, that we create more awareness and interest. Then as we begin to qualify them and want to do the demonstrations, we're in a position right now by adding reps that if there is a need for anybody to get demonstration immediately, we will be right there. So we're not totally reliant on when can we get this rep or that rep from this company in there and do to the closing. That other thing that we want to talk about is we think that there are places where there's a great conversation to be had with large group practices, some of these mid-market DSOs that today we're not covering as aggressively as we should be, where we can actually bring the message of what chairside dentistry, what's some of the advantages of cone beam are as they begin to look at different procedures that they can do within their DSO. And we're not covering them today, so we want to cover that. So we are looking at the reps principally as helping immediately qualify and do demonstrations as well as reach people that we haven't been typically focused on in terms of some of the kind of the mid-market DSOs and other large group practices where we think our chairside message should be extremely relevant and should have real economic viability for them.

(Operator Instructions) We'll take our next question from Jon Block with Stifel.

I'll ask one question, 2 parts, though. So just talk about a handful of good things for '19. Don, you mentioned accelerating revenue growth. There's opportunities in OpEx. How do we think about gross margin? Nick, if the emerging increases as a percent of revenue, I guess, Nick, is there that long-term opportunity in gross margin as well? And then just a follow-up on DI, and I really don't mean to sound too aggressive, but it does seem like Sirona, the innovator, if you would, in dental, was really behind on a critical DI product cycle. And DI is out there in a lot of places for sort of sub-$30,000 and others are bundling it, so can you guys be a little bit more specific on what you're going to do there to better compete? Is it price or bundling? If you could talk to that, that would be very helpful.

So I'll go quickly, and I appreciate the double question. Sorry we didn't give Steve the opportunity earlier. But -- so I would say that we view the opportunity to leverage our fixed cost as very real. Obviously, that worked against us in Q1, given the lower sales level, but we view that as an opportunity. And then secondly, as I did highlight, some of the things that we're doing will get directly to reducing our operating cost structure, like consolidating distribution centers in Europe, in the U.S. as well as, to some degree, manufacturing facilities, which obviously take a little bit of a longer lead time. So we do see operating leverage both at the gross profit and the SG&A level over time, and that's clearly part of our cost savings as well as where we're looking to consolidate operations.

Yes. And Jon, again, well played on the double question. The -- look, on the DI product cycle. First, I would debate you a little bit. We think our Omnicam product is terrific when used as a DI. And actually, one of the things that we're now talking about extensively internally is let's get Omnicam out aggressively because we believe that, that's the beginning of a journey that will take people to chairside dentistry. And again, we think chairside dentistry is really, really important. It's got economic benefits that are still very important to the dentist. And to be honest, in a world where people are time-constrained, doing a one-visit crown procedure, we think, is very viable. But I would agree with you that we probably have been a cycle slow in terms of marketing our products as DI. And you mentioned that there are people out there, sub-$30,000. I think the actual price is less relevant than how they're going about it. And in terms of, let's get an iTeros out and monetize that on clear aligners or some other ways. We believe we have a, first, a really competitive product. Second, we think that we actually have a portfolio that can help make that very, very relevant, whether it's through incentives to use our implants with our equipment or our equipment with implants. We believe we have a lot of opportunities that we're, again, we're starting to push around the world with a reasonably good level of success. And that is a high priority for us to get after in the back half of the year. So we have spent a lot of time talking about what DI is. Ultimately, we think: a, we have a competitive product; b, it's important to get that product out more broadly because we believe it's the beginning of a journey to chairside dentistry; and, c, we believe that we actually have a portfolio that would allow us to combine our Omnicam as a DI product with other products in our portfolio that we think should be very, very relevant to practitioners all around the world.

And our next question comes from John Kreger with William Blair.

Don, I think at the beginning of the call, you talked about an evolving market, particularly in the U.S. Can you just go back to that and expand on it? What sort of structural changes are you seeing in dental, particularly in the U.S.? And what do you need to do to sort of get out in front of those changes?

Yes. Thanks, John. And what I was referencing, look, if you actually take a big step back over the last 2 years, 2 years ago, there was Sirona dealing with a single distributor. Then we merged, we did DENTSPLY SIRONA. Obviously, there's been some changes with Patterson. And obviously, the market evolved to the point where there are now multiple dealers carrying multiple pieces of equipment. So you go from where the market was relatively clearly defined in terms of what everybody's role was in terms of selling Sirona equipment to, today, that, obviously, our dealers carry multiple lines of equipment. And right now, some of that activity that they're expanding goes to explaining the differences between one piece of equipment and another. There has not been, in my opinion, as much effort spent on how are we priming the pump, how are we every day trying to bring 100 new doctors into chairside dentistry and actually getting the demo. So in our conversations with our dealer partners, they have been both very clear that they're excited about our equipment that -- again, we think our equipment is second to none, whether that's in CAD/CAM, whether that's in the 2D or 3D x-ray, cone beam areas or whether that's even in DI. What we need to do is we need to take more ownership for creating ultimate demand for the product. We need to be creating the category of which we still have, by far, the largest share. So what you hear us talking about, John, as we go through this program is, again, we sat there and said, "We're talking about marketing programs that are going to enhance communications delivered and talk about the benefits of these specific products." We're going to be working with the dealers from how do we take that interest and begin to qualify some of these opportunities more aggressively. And then by having additional people on the street, we think we can get to a more personalized demo very, very quickly. Or we can now bring them down to our Charlotte facility and work on closing. So again, 2 years seems like a long time, but it's really not. We've gone from a single company with a single distributor to a merged company that's now dealing with multiple dealers carrying multiple products. And I think, over the -- our expectation as we -- in our case, as we are now well through the idea that we're -- we've done a merger and we're now focusing on our customer, we expect the dealers, as they get more comfortable and proceed to getting very used to selling multiple pieces of equipment, we think the market will return to something that looks a little bit more like it has historically. The biggest difference in our mind is that we're going to be taking a lot more ownership and spending, in our minds, correctly to kind of prime the pump in a way that we're going to increase demand for whether it's chairside dentistry, whether it's cone beam or whether it's DI.

The only thing I would add, John, is that you've also seen with the digital technologies that we've led with in a very sophisticated manner expanding the ability of general practitioners to do more specialty procedures. Certainly, that improves the revenue in their practice. I would say that, that also requires a high level of clinical education. And as Don has highlighted, our new facility in Charlotte is going to complement our other facilities around the world to really be a leader in that clinical education, which we think is very important content to have as part of what we're bringing to the market. So I would say, you're seeing more and more GPs who want to expand to specialty procedures, but they need the training, and will leverage our products. It's another key trend that's evolved in the marketplace that we hope to further capitalize on.

And our next question comes from Erin Wright with Crédit Suisse.

I guess, what have you been able to accomplish in adjusting your sales force incentive structure to drive whether it be digital -- stand-alone digital impression or better cross-selling? And what can you implement near term on that front? And what -- when will that really materialize? And a follow-up to an earlier question, what sort of -- just more broadly, what sort of top line growth do you need to have or to see in sort of meaningful margin leverage across your business over the longer term on a more normalized basis? And how do you envision that longer-term top line growth for the business?

Yes. Thanks, Erin. On cross-selling, look, I'd say it's really early. What we're doing right now is we're learning, we're creating case studies that show us that we can, in fact, do that whether it's some of our Omnicam with implants program that we're actually executing in a couple countries around the world right now or whether it's stuff that we just saw in orthodontia with Omnicam, with some of the stuff we're doing at OraMetrix. We're working through how that actually works, how we assign credit to what sales organization and how do we incentivize people to go after it. One thing I would tell you that we are going to be able to do relatively quickly and that should help us is we have people in dentists' office all around the world virtually every day. And right now, they're really not in an information-gathering mode. For perspective, if somebody goes in to talk about implants, we've never really asked them, "Hey, what equipment is in there?" Or if we have an equipment rep who's going into an heavy implantologist, "By the way, what implants are you using?" And we haven't gathered that information, Erin. And we're in the process of converting that into one of the basic pieces of work that all our sales people will be doing, not only in the United States, but all around the world. And then capturing that, processing that in such a way that it becomes usable information is critical to us, which is one of the reasons I referenced salesforce.com. So when we start talking about CRM and other things, it becomes important to us. And I'll let Nick talk about the top line and the way to get the margin level.

Yes. Obviously, Erin, we've said in the past that we believe, given our platform technologies and global footprint, that we should grow better than the market. So I'll leave it among all of you on the phone to figure out exactly where the market is growing globally, but we believe we should grow better. And I also noted, we're not seeing any real price erosion across our categories. So when you combine those 2, we firmly believe that, that targeted growth rate will achieve operating margin, gross margin improvement. But I'd like to defer to our Investor Day meeting in September after we've had a chance to really coalesce all our thoughts and develop our strategy to give you guys a better view in terms of our long-term revenue target.

And margin target.

And margin target, yes.

And we'll take our next question from Yi Chen with H.C. Wainwright.

By hiring additional sales reps starting in this quarter, do you -- does that suggest that you intend to rely less on sales force of Patterson and Henry Schein to drive top line growth?

No. Again, we look at hiring the additional reps as well as pushing through programs at a number of different areas as more priming the pump and focusing on demonstrating the product and basically moving people from the idea of interest to more qualified leads, which the Patterson and Henry Schein reps will take from there. Again, we've said that we believe that our partners are delivering value and are essential to how we view our go-to-market strategy.

And we'll take our last question from David Stratton with Great Lakes Review.

When we look at pricing, you mentioned it was stable for the quarter. And I was wondering if you could give some color on expectations as we move through the year and whether or not the inventory build that you're working to take down will be impacted at all by that?

Yes, I would say, David, thanks for the question, but we do not see any change in the pricing environment for our products nor do we see the inventory reduction to have any impact on that overall environment. So we expect to work on the inventory as we've discussed and pricing to remain stable for our full range of products.

Thanks, Nick.

And that does...

Go ahead, Leanne, you conclude. I was just going to say thanks everyone for us today. We look forward to speaking again in August at the end of our Q2 -- with our Q2 results. And we're also, again, very excited about the opportunity to have everyone come down to Charlotte and see what we think is a truly important initiative live and up close. So again, thank you, and I hope everyone has a great day.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.