Welcome to the DENTSPLY SIRONA Second Quarter 2016 Earnings Conference Call. At this time I would like to turn the conference over to Joshua Zable, Vice President of Investor Relations and Corporate Communications. Sir, you may begin.

Thank you. And good morning everyone. Welcome to our second quarter 2016 conference call. I would like to remind you that an earnings slide deck presentation relating to this call is available on our website at www.DentsplySirona.com. Before we begin please take a moment to read the forward-looking statement on slides 2 and 3 of our earnings slide presentation. During today's conference call, we will 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. With that, I will now turn the program over to Jeffrey Slovin, Chief Executive Officer of DENTSPLY SIRONA.

Thanks, Josh. It is my pleasure to welcome you all to our second quarter conference call. Also joining us on the call today Uli Michel, Executive Vice President and Chief Financial Officer; Chris Clark, our President and Chief Operating Officer, Technologies; and Derek Leckow, Vice President of Investor Relations. Our second quarter represented our first full quarter as DENTSPLY SIRONA. We're now at day 168 of the merger and after seeing the progress we've made and the talent we have I'm even more optimistic today than I was on day one. Our culture remains a top priority for myself and the management team. We're already seeing the benefits of our focus on this priority. We're designating resources to ensure that our people come together as a high-performance organization. During the quarter, we selected culture champions and have begun to hold workshops. Our 15,000 employees are embracing our mission, vision and values which are all aimed at accelerating growth and having a greater impact on the dental community. I am also pleased with the rollout of our new DENTSPLY SIRONA brand. Across the globe our employees are embracing being one global team. From recruiting to trade shows Toronto to Tokyo our employees are welcoming the opportunity to put forward a unified brand. We're on track to hit our synergy target of $125 million by the end of our third year. We're beginning to ramp up investments in these opportunities and are confident that they will deliver strong returns. Later on I will share some early success stories. Integration and synergy capture are high priorities but we also remain focused on the business at hand. Turning to the second quarter, constant currency revenue growth of 3.4% was driven by internal growth of 2.4%. Rest of World led with 7.5% internal growth, showing…

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 second quarter our reported revenue increased $324 million to $1.022 billion, up 46.4% from last year. Adjusted sales of our combined businesses, excluding precious metals, grew 3.4% on a constant currency basis. Internal growth was 2.4% excluding a 1.5% favorable impact from net acquisitions and 50 basis points unfavorable impact from discontinued products. Foreign exchange movements were a headwind, revenue of approximately 70 basis points. As a reminder, these growth percentages reflect the performance of the combined business as if it had been consolidated on January 1, 2015. Jeff already addressed revenue growth by geography and segment. We 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 $526.9 million, up $127.2 million or 31.8% from 2015. Gross profit as a percentage of net sales, excluding precious metal content, decreased by 680 basis points to 52.4% from 59.2% in the prior year. As you can see on the non-GAAP reconciliation tables, the gross profit margin was negatively impacted by 780 basis points, mostly due to the effects of step-up amortization and other merchant-related items. On an adjusted basis, gross profit margin was 60.2% for the quarter. The Company generated benefits from its global efficiency program which largely offset negative foreign currency impacts. Reported SG&A expense which includes R&D, was $402.1 million, up $127.1 million or 46.2% versus last year. This equates to 40% of sales excluding precious metals, 80 basis points below prior year. The decrease was…

Thanks, Uli. With our second quarter behind us we have even more confidence that DENTSPLY SIRONA is ideally positioned to benefit from six megatrends in dentistry. First, positive demographics are driving the need for more dental care around the world. With the broadest portfolio of products and the widest geographical coverage, DENTSPLY SIRONA is in an outstanding position to capitalize on this trend. We're actively driving two other megatrends, the adoption of digital dentistry and single visit dentistry. It is broadly agreed in the industry that both of these will become standard of care. While everyone is trying to jump on the digital wave, just offering a product in the category isn't enough. Brand, technology and service are key differentiators. As the innovator and market leader, DENTSPLY SIRONA uniquely provides the confidence to dental professionals to go digital. We're committed to keep investing in R&D to maintain and extend our leadership position. Last week we saw another good indication that these trends are accelerating. In Berlin the German Society for Computerized Dentistry opened a digital dental academy. This establishment is the first of its kind in Europe. They chose to partner with DENTSPLY SIRONA for equipment and consumables. This organization will work with leading universities and facilities to privately train on digital workflow. Additionally, we see dental labs increasingly partnering up with dentists to assist them in buying our Omnicam. Digital impression is proving to not only be positive for the dentist and the patient but for the lab, as well. Another megatrend is the general practitioners are expanding their practice and performing more specialized procedures. To do so, they require technology as well as training and education. DENTSPLY SIRONA has the broadest clinical education platform in the industry. Each year we train over 300,000 clinicians covering all procedures and…

[Operator Instructions]. And we will take our first question from John Kreger with William Blair.

Jeff, can you maybe just address what you see in terms of any changes in the markets, particularly given what Schein said yesterday about the U.S. tailing off in the last few months? Thanks.

Certainly. Well, of course, you know Schein is a very important customer to us and we take their insights seriously. I have to tell you I'm pleased with the growth in our quarter in both of our segments. Certainly to see consumables lead the way in the U.S. showed solid growth. Saw some really nice rebound from our lab business and ortho there. We would say that the market is stable and we continue to be optimistic about it as we progress through the summer. Keep in mind that there is ebbs and flows in the summer and there can be some spottiness with that. We're excited about the demand we see for our CEREC world event next week which seemed to pick up the attendance in June and July, so we think that's positive. Certainly we're announcing a number of new products which I think is always critical to driving growth. So can't really comment on seeing too much softness, but certainly in parts of the business we can understand why that could be said.

Thanks, Jeff and maybe just one quick follow-up. I know it's early days but can you talk about where you are seeing the greatest traction initially in your revenue cross-selling efforts? Curious if you're seeing more pull-through on the consumables side or on the technology side? Thanks.

It's a great question and something we're working at across the globe. Keep in mind that we've set our organization up in five regions, so each one is distinct. And, of course, there are opportunities across -- we found that there is some real opportunities on both the consumable and the technology sides through the cross promotions and sharing of leads and cross KOLs. The fact of the matter is that the world is going digital and there is a clear connection between our endo business and 3D and intraoral which is playing out well for us. Also with regard to implant we're seeing some nice bundling opportunities with our 3D there and also on custom abutment. But I would say that we're looking to show balance throughout. What you have to keep in mind is that we've got over 100 initiatives that we're working through. And it's still early days and I would say that you will still see the 80/20 rule that 20% of our programs will drive it but it's too early to say. I'm very impressed with the collaboration and the creativity of our teams on the commercial and SBU side to work together at this stage.

The next question is from Robert Jones with Goldman Sachs.

Just to push a little bit more, Jeff, on the internal growth in the U.S., obviously a noticeable slowdown from recent trend. If I think about your portfolio you have products that go through distribution through distributors and obviously as well as products that go direct. When you look at your sales data for 2Q did you see any difference in the sellout rates for products that went through distribution versus direct?

Well, look, I think that we certainly came off a good first quarter and specialty did grow a little bit faster which is our direct business than through distribution. But not extraordinarily faster, but we're pleased with what we saw with lab. You've got to remember that lab has been a drag on our business and I want to commend our team for really dealing with the restructuring and getting back to business. And another business of ours that has been going through a longer term restructuring is our ortho and it showed solid numbers and, of course, we can always count on our endo business to do well. But by and large, I thought it was a solid quarter for consumables and Chris, any comments from your side?

No, I think you hit it. I think that clearly ortho, specialties did nicely in the U.S. in the quarter. Consumables did well. We had some pretty strong first quarter on some of the technology side as well as in some cases a tough comp. So, again, I think you've hit pretty much the relevant players.

And then I guess just a quick follow-up on the operating margin. Pretty strong performance in the quarter, trending now above that 22% for the year. Yet I noticed you maintained the 21% to 22% for the year. Just wanted to see if there was any factors that we should be thinking about that might make the back half from an operating margin standpoint regress a bit to get back into that 21% to 22% range? Thanks.

Yes, maybe that's a question I can address. Look, we were very pleased with the margins in Q3. We sold a pretty good mix of product. We've not redeployed some of the investments we had intended to make from the global efficiency savings and some of the early costs we saw coming out as a synergy. So we will invest a bit more in the second half of the year. Then if you look at the seasonality of our business, Q2 is traditionally probably the highest quarter in the year. So we have higher revenues, a lot of our costs are fixed and do not fluctuate that much with revenue. So that gives us a bit of a lift in the second quarter. Every year you will see a bit of a downturn in the third quarter from this. And in the balance of these two factors we guided to the EPS number we did. And we based on margins that should be somewhere between 21% and 22% for the full year.

Keep in mind, Bob, that mix plays a critical role for us. And as we look to the rest of the year we wanted to be prudent how we thought about our range.

The next question is from Jeff Johnson with Robert W. Baird.

So Jeff, maybe a question, coming out of yesterday's call from Henry Schein the other thing I think other than the U.S. market that came up is Europe actually sounded a little better for them. I know you had tough comps but maybe you could walk us through your view on just general end market conditions in Europe.

So I think Europe fundamentally has not changed since our last call except for something called Brexit which certainly adds another level of uncertainty. We had some early benefits that really highlighted a bit from it, but that would be a change. What I would tell you is that Europe did well for us in general from a perspective that Germany was a drag. We could not expect with the extraordinary year we had last year which was truly a record, that we could grow on that. I wouldn't say we lost any market share there. And as I look -- if you take Germany out of Northern Europe, it was rather solid for us. And certainly as we look at Southern Europe very solid and feel good about what we saw growth in France, Italy, Spain, a positive quarter for us in Europe.

And Uli, maybe just a modeling question for you. EPS guidance in the back half of the year seems to imply basically flat. I know you said a $0.10 headwind from currency. I think that currency headwind has gone up. Can you just confirm that, number one? And number two, even if we adjust that out I guess trying to figure out after two solid quarters here of EPS beats just what maybe drives a slowing of EPS growth in the back half of the year. Thank you.

Maybe we will start with the FX impact. When we last spoke to you we said that the guidance implies about a $0.10 headwind in FX. We've had for the full year we've had a $0.04 headwind in Q1. We've now had an all-in $0.01 headwind in Q2. But that includes this one-time impact from the Brexit moves. What happened is that we supply out of Europe into South America, Asia, Australia, Eastern Europe, many of these countries products and we have receivables on our euro books in Brazilian real, in Japanese yen, in Australian dollars, South African rand, you name it. And all these currencies suddenly strengthened to the euro when the Brexit vote happened. And we realized about, we didn't realize, we record about a $9 million gain on these in the Company receivables. Now who knows whether these will stay or whether the exchange rates will move back. Guidance does not give everything else being equal full credit to this gain. Now if I look what is happened since quarter end we probably lost somewhere between $0.005 to $0.01 again on these gains by currency movements. If they stay that is a positive. Now when we give guidance we weigh all the pros and cons very carefully and we try to give you the best estimate and a balanced judgment of what we see. And there is upsides and downsides and sometimes we end up being too optimistic, sometimes too conservative. Maybe on the FX point we've taken a bit of a conservative view. But on the other hand, our guidance does not include a deterioration of end markets in the second half of the year. And you know, you've heard one of our biggest customers yesterday expressed more concerns. We looked at it, as Jeff mentioned we saw the spottiness and softness in parts of the U.S. consumable markets going into the summer, as well. But when we look at the big picture, the macroeconomics for North America, very strong. Job creation is good, especially white-collar jobs. So we sat here and we said look, fundamentally we do not really see why there should be a major deterioration. So we did not include this in our guidance and in the forecasts we had prepared. So if we weigh all this we do think it is a realistic and weighted guidance that we gave you. There's a range. You can apply judgment yourself, if you believe based on the factors we explained to maybe we might end up rather on the upper end or on the lower part. But we try to be transparent with it and we apply our best judgment we can based on all the facts and circumstances we see and we know. And it was a lengthy answer. But I hope it helps you think through the things, Jeff.

The next question is from Steve Beuchaw with Morgan Stanley.

I might take the same tack that Jeff took and ask for some reflections on the puts and takes on the balance of the year. I ask the question because here with a 4% to 6% organic growth outlook it implies a pretty big range of possibilities in organic for the back half of the year. It seems like consensus might be in the lower half of the range. Can you give us a sense, given that it sounds like Jeff you're pretty comfortable with where the markets are trending, what you're looking at as the bigger puts and takes in terms of organic for the balance of the year?

Look, right now the UK which is about 5% of our business is flat, but I think nobody knows exactly where that's going to go. The aspect of the real uncertainty in the overall macro market it's still out there. Russia has not improved. While we're pleased about what we're able to do in Brazil and China, those markets are challenged. The Middle East continues to have some difficulties. So we have to put that in the overall perspective. We heard from Schein yesterday what they are viewing. We can't discount it, although we don't see it but we see it a little bit spotty way. And then we talk about the bigger issues which is the macro trends and the megatrends which we talked about earlier in the call which are all working our way and plus and the ability for our team to come together which I think is very positive with what I'm seeing. And you can't emphasize enough how good it is to recognize some of our businesses that have taken a little bit of time to get back like lab and ortho starting to progress. Remember we set Rest of World would be our driver of growth this year but as we go into the third quarter, remember that's a pretty tough comp record. IDS and CEREC 30 was strong. So we've got to keep that all in our consideration. And I think that's my perspective of pulling out some of the stuff that Uli was saying and that's built into our range. We will certainly, are we optimistic that next week's SIROWORLD will be -- sorry, Steve -- will be a very positive event for our organization? Absolutely. But we've got to move through this summer and see how we finish up. And we've decided it's appropriate to keep the range that we have given all of those issues. But we don't see a fundamental change in our business proposition that we have. In fact, we would say that we're seeing more and more indications that being The Dental Solutions Company and being able to offer these integrated end-to-end solutions is exactly what the dental profession is looking for.

I wonder if you could reflect for just a minute in a little bit more detail on the thinking around the MIS Implants transaction. When you look at your customer base, Jeff, now that you have a premium implant brand, what do you think the percentages of doctors out there that are using a value and an implant brand simultaneously? How do you size up that opportunity and are there any regions where you think having a value offering can make you stronger, materially stronger as a Company in terms of your commercial reach?

Good. In a moment I'm going to let Chris comment as well because he's worked so hard with the team on this acquisition. But let me just tell you MIS is an organization that both companies were looking at prior to the merger. Actually saw a management team that would fit the culture, an innovation cycle that we had thought and has the ability to lead the way in the value segment. So very exciting opportunity for us specifically to get into the value segment which we know is growing faster than other segments in dental. And a $1.5 billion market size is something that's significant when you're talking about a market that's maybe $25 billion overall in dental in the space that we play in. I think when you cobble that together with the installed base of customers we have, there's a lot of room. We do see a trend that more and more dentists are having a dual brand strategy to meeting their implant needs. And from a perspective of making a decision in this category, we thought MIS had the best brand that cut across multiple regions and countries. Most value brands are country specific. MIS is unusual to that and is an exciting product to add to our portfolio. Chris, let me hand it over to you.

Steve, I would basically just emphasize a few of these key points. Again, there aren't too many $1.5 billion segments in dentistry we're not in. That's certainly very attractive. Certainly the value segment has been growing faster in this market than the premium segment. There is some overlap of customers, but there is also we view this as a distinct segment in a lot of ways. And with that we think a separate go-to-market approach is going to be very effective for us here. We view this as a key opportunity in emerging markets. They've got a very strong presence in a number of these and we're very excited about that. And again as Jeff mentioned, they've got a pretty similar culture. We're impressed with the management team, we're impressed with their ability to drive success both within Israel but outside of their home market, as well. And, again, I think this will be an important part of our implant strategy moving forward as we look to drive market leadership.

The next question is from Matt Miksic with UBS.

This s Vik Chopra in for Matt. Just a couple of questions over here. So with the recent MIS deal that you guys announced, can you help us understand how you think about future M&A at this point? Are you still open to additional tuck-ins?

Absolutely, we're. We've said that as part of our overall strategy. Again, we always have to balance the major integration that we're in right now, continuing to drive our current business and the possibilities for the future. But continuing to consolidate and have tuck-ins is a very important part of our strategy moving forward.

Just one follow-up if I could. Just in terms of where you are looking at, is it technology specific or geographically-based? And then how should we think about synergies at all on the MIS deal? Thank you.

Look, being the largest player with the widest portfolio and actually coming together as technology and consumables, I'd have to say we look at just about everything. But there's a lot of criteria that has to fit. And I don't think we need to get into that on this call. But I would say that the MIS was a really important acquisition for us because we believe with the value proposition that we have in the geographic reach and when we take a look at our customers, this is an area that we just didn't play in. And as both Chris and I have said to not play in a $1.5 billion market that has a faster growing profile than most of the others is just something that we felt was inappropriate for our organization and felt that we needed to do it. And I'm excited we've been able to do that.

The next question is from Robert Willoughby with Credit Suisse.

Jeff, did you comment on any residual capacity constraint issues around the zirconia line? And then a real hard-hitting one, do you have an accounts payable balance for us at the end of the quarter?

Look, we did have some constraints in the quarter on our zirconia package, if you will. And certainly it's always the case when we're ramping up a new product. Unfortunately, we're not making hundreds of thousands of these. So the ramp-up to get the quality in place does take quarters to do that, but I'm happy to say that the team's worked hard and we're open for business and orders. With regard to payables, Uli is tracking that number down for you.

$227.1 million.

The next question is from Jon Block with Stifel.

Maybe just a couple of cleanups or follow-ups. So Jeff, on the value implant market you've called out $1.5 billion. Is the overall $3.5 billion to $4 billion? And then sort of how do you see the growth rates of those two markets? And then Uli, I don't think you've talked about timing and the close and maybe the level of accretion from the MIS deal in the first 12 months. And then I just have a quick follow-up. Thanks, guys.

Chris, do you want to take the first bite and I will take the second?

You bet. Jon, relative to the relative market sizes I think that $3.5 billion to $4 billion overall is probably pretty close when you combine premium and value together . It also includes additional products in there, for instance regenerative products, etc., that we would view the overall global implant market in retail in that $3.5 billion to $4 billion range. Relative to relative growth sizes, again if you look over a longer time period value implants generally are growing in the mid to high single-digit range, probably skewing over a longer period of time in the high single-digit range. And as you look at premium implants, they would be in the low to mid single-digit range. So again, from that angle you will look at it. Quarter to quarter or year to year it may fluctuate slightly, but over a longer period of time that's probably pretty typical.

Jon, my follow-up would be that we fully expect MIS to grow in the high single digits and then surprise in quarters growing even more than that with the product offering we have. We certainly did not pay a cheap price for this. So we have high expectations and we believe that it's the brand and our overall ecosystem will be able to support that growth.

It comes to timing. There's two approvals still outstanding as conditions to closing we're waiting for. We do anticipate that this should still happen this year. On the first 12 months, the acquisition will be accretive to adjusted earnings per share, but the few months we might get into this year probably doesn't swing the needle much.

Then just as a follow-up, Jeff, yesterday's news at Schein was I think surprising to most. So maybe your thoughts or any color you can give on the distributor ordering patterns so far in the third quarter in North America? Again, they talk to the slowdown in June that largely persisted into July. So have you seen any change in the cadence of distributor ordering patterns so far in the first six weeks of the quarter? Thanks, guys.

Look, I think we've got to keep in mind that we're talking about a market that's right now in the GDP plus or minus on it which means you can have some fluctuations in a month and it's difficult to tell whether that has started a pattern. We certainly don't have the same visibility that Schein does on this but it's not been an unusual summer for us. But I would also say we did highlight when we gave guidance and we're reinforcing it today that Rest of World is the fastest growing area for us and our biggest driver.

The next question is from Matt O'Brien with Piper Jaffray.

This is Matt in for Matt today. Thank you for taking the questions. Can you talk a little bit about the impact DSOs are having on your business and are they executing on chairside opportunity? Thank you.

Group practices are certainly having an impact in our business. I think that's why we highlighted it as one of the six megatrends. Now you're talking to the CEO, Matt, here and I would tell you that we're never happy about doing enough in the group practice area. We do believe that they appreciate everything that DENTSPLY SIRONA has to bring to the group practice to their individual operatories. I think our 360 program has been extraordinary. The ability to educate and train is something that we've differentiated ourselves. We've got world-class brands and we're able to help them with the procedures. Certainly I would see more and more that group practices appreciate the impact that digital dentistry and single visit dentistry has on their practice. It's our belief you are going to see more of that in the quarters and years to come.

Matt, it's Chris. I might also add that as the synergy teams come together focusing on the revenue synergy opportunities, one of the areas that they are particularly focused on and excited about with a tremendous amount of energy is, in fact, DSOs and group practices. They see the unique opportunity of the combination here driving unique value to this customer group. And, again, it's exciting to see their excitement. So I think you will hear more and more from us in this area as we move forward.

And I think, just to add to that, this is becoming more than a North America phenomenon. Chris is really highlighting what we're seeing around the globe.

The next question is from Brandon Couillard with Jefferies.

It's Sachin in for Brandon. Uli, would you quantify the expected CapEx outlays in 2016 and what type of free cash flow conversion do you expect to realize for the year?

Yes, the CapEx number we would expect in the range of $110 million to $125 million for the year. And CapEx conversion as we said before should clearly be above net income. We should convert more than 100% of our net income to free cash flow.

Jeff, would you provide some color on the Rest of World markets? This geography has been growing in line to above your composite average for some time. So just curious if that's puts and takes driving that performance and the potential runway remaining?

Sure. I think Australia continues to be strong for us in the quarter. Canada is in Rest of World for us, so real positive driver. Pretty pleased to see Latin America, including Brazil, hold up and grow solidly. And then China. With all the talks about what's going on in China, I would say that we've put together very solid growth and the reality is that 7.5% is significant.

We can probably say Middle East is a bit more challenged. We can say Jeff--

I said it earlier, yes, that's right.

We do see this in our business.

I think on the long term, a critical market for us and we're all excited about is Japan. Japan showed some slowness in the quarter, multiple reasons for that. I think we're on track. Feel good about the team we have there and the product offering, but Japan has got to be a long term driver for us. So we would have done better had we gotten more there. But understand what's going on there, as well.

That concludes today's question-and-answer session. Mr. Leckow, at this time I will turn the conference back to you for any additional remarks.

Thank you all very much for your interest in DENTSPLY SIRONA. We're looking forward to updating you on our next call in November and if you have further questions we're available for follow-ups. Enjoy the rest of the summer. That concludes our conference call. Goodbye.

Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.