Good day, ladies and gentlemen, and welcome to the Dentsply Sirona Q2 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session, and our instructions will give at that time. [Operator Instructions] I also reminder, this conference call maybe recorded for reply purposes. It is now my pleasure to hand the conference over to Mr. John Sweeney. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to our second quarter 2019 earnings conference call. I'd like to remind you that the earnings press release and slide presentation related to this call are available on our website at www.dentsplysirona.com. But before we begin, please take a moment to read the forward-looking statements in our earnings press release. And during today's conference call, we'll make certain predictive statements that reflect our current views about the future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. And our most recent Form 10-K list some of the most important risk factors that could cause actual results to differ from our predictions. Now with that, I'll turn the program over to Don Casey, Chief Executive Officer, Dentsply Sirona.

Thanks, John, and thank you for joining us on our earnings call. Overall, we are pleased with the second quarter performance and we remain focused on delivering the core elements of our restructuring plans that includes growth, margin improvement and organization simplification. Second quarter internal growth reached 3% in-line with the target we outlined last November. We feel good about our strong new product lineup which we expect to deliver sales growth in the back half of the year. Our new simplified structure is improving our efficiency and has enabled us to make significant progress against our headcount goals. Today we reduce FTE [ph] by approximately1000 heads giving us the flexibility to be more selective with new hires to drive key growth and strategic initiatives. Second quarter gross margin was 58.2% up 130 basis points compared to prior year. Operating disciplines contribute to an almost 300 basis points improvement in our adjusted operating income margin levels, which came in at 20.2 for the quarter. Our second quarter along margin level bears testament to the progress we have made in executing our strong [ph] margin level bears testament to the progress we have made in executing our restructuring. Our results clearly demonstrate and sales growth, with discipline spending management create significant operating leverage, which drove an adjusted EPS of $0.66, up 10% compared to prior year. Operating cash flow was strong at a $145 million, up $28 million as compared to prior year. So overall, it was a solid quarter. And I'll now hand it over to Nick, who will review our financials.

Thank you, Don. Looking at slide eight, our consumable segments accounted for 44% of our revenue for the second quarter and represents a diverse portfolio of products that are sold globally. In the second quarter, consumable revenues ex-precious metals were $442 million, down 7.8% as compared to prior year and down 4.1% on an internal growth basis. This performance was clearly below our long-term growth expectation for the consumable business of 2% to 3%. Let me highlight key issues that drove the decline. Our consumable business tends to be very steady on an annual basis. But we're seeing variation by geographic market in the quarter-to-quarter results. As we've analyzed this, we saw a trade program that impacted retail versus wholesale sales. To address this, we have now put in place a more disciplined approach and will focus on driving retail consumption, leading to a net reduction in wholesale-oriented promotion activities. Consequently, we had a flattening of our sales over a few quarters. We retain a very positive outlook on the consumables market and continue to believe that our growth will be 2% to 3% next year. I’d also note that we have a strong new product line up in the back half of this year that will help to bring our performance back towards a normal run rate. Consumable margins of 27.6% declined 240 basis points as compared to prior year. The reduction in the consumable operating income margin was due to low volumes and an unfavorable foreign exchange, which together more than offset our cost control initiatives. On slide nine we highlight our Technology and Equipment segment, which accounted for 56% of revenue. Second quarter T&E revenues were $515 million up 0.6% versus prior year, but a healthy 9.3% on an internal growth basis, driven by the success of…

Thanks Nick. Let me first cover off an important executive appointment. We recently announced Jorge Gomez will assume the role of Executive Vice President and CFO of Dentsply Sirona effective in late August. His role will include finance, Treasury, tax, Investor Relations, information technology and the office of business transformation. With Jorge we bring a talented global executive with an in-depth knowledge of the health care industry. I believe he is bringing the right mix of skills and experience as well as a solid track record of successfully managing global financial operations. Prior to joining Dentsply Sirona, Jorge was CFO with Cardinal Health. Before that he had many other roles with increasing responsibilities within that organization. He also has experience with General Motors and Smurfit-Kappa Group. Having worked with Jorge for several years, I'm excited to bring his unique blends of commitment, business judgment and passion for people with Dentsply Sirona. Moving to slide 15, I would like to provide a brief update on the progress we are making against our restructuring goals. That restructuring was built around three core plans [ph] as we've set, revenue growth, improving, and simplifying the organization. Slide 16 provides a detailed update on the major components of that restructure. We've been operating in our new products groups as well as our streamline regional commercial structure close to six months. As the organization head over 100 years of history and the old structure, this represents a major change. We have consolidated supply chain and brought in world class talent to help us create a single structure to manage manufacturing, logistics, planning and procurement. This group is off to a fast start and this is a key reason where gross margin improved 130 basis points as compared to prior year in the second quarter. We have…

Thanks. Good morning, guys. It would be helpful to get a little bit of color behind what you were talking about the channel. It was an excellent in the consumables channel in the quarter?

Sure. Thanks Elizabeth. Thanks for the question. Thanks for joining us today. You know, why don't I just take a quick step back and kind of walk through our thinking on consumables and then you know, deals specifically with the channel inflows and outflows. Obviously, we're not comfortable and happy with where we are in consumables. And when you look at the numbers we saw, the first quarter, second quarter, you kind of step back and ask yourself a couple questions. I mean the first is, do we think the market is fundamentally changed on a global basis? And, you know, we see a lot of retail trends and talking to dentist and looking at patient count, we don't feel there has been a fundamental shift in the marketplace. But our analysis really showed us two things. I mean the first is if you look at our innovation track record over the last 18 months, particularly the consumables segment, we did not have a whole lot of big innovation. And, I think when you're in categories like our preventive and resto business or endo business without innovation. You don't see the sales force excitement; you don't see the opportunities to grow. The second thing was that we saw is a lot of the movement, we think consumables are pretty steady. But there is a fair amount of movement, as Nick mentioned, quarter to quarter. If you go back to Q4 of 2017, we saw a very aggressive program that resulted inventory and we worked that off in Q2, you saw things like [indiscernible] where we had difficult time shipping things in the in Q3, and then ship the things into Q4. And our dealer partners were questioning how reliable we were going to be in shipment, so you saw a…

Perfect, that's very helpful. And then as we think about you obviously had a nice uptake in the gross margin line year-over-year, as we think about the pacing throughout the rest of the year on that line, is there anything you think you would particularly call out that we should be aware of?

It's Nick speaking. Nothing particular, we expect our gross margins to be relatively stable, versus the Q2 level that you're seeing on going through the rest of the year.

Okay. Perfect. Thank you very much.

Thank you. And our next question will come from John Kreger with William Blair. Your line is now open.

Hi, thanks very much. It sounds like your dental implant businesses doing a little bit better. I think you said 2%. Can you talk about how that has trended over the last year? Is it in fact better? And in what's driving it?

Yeah. Hey, John, thanks for the question. Implants, a couple things on our implant business. We made a pretty significant shift from a leadership perspective, we brought in one of our real strong veterans, his name is Gene Dorff and we're really starting to operate our implant business as a group before we have four very significant brands, and they were each kind of pursuing their own strategy. So, basically, by beginning to consolidate that beginning to look at manufacturing efficiencies, more importantly, R&D and mapping out where we need to go from an innovation perspective, and really taking a more focused approach in terms of how we look at each of the brands and promote those brands. We feel that we're starting to get traction in the marketplace I can tell you that, we want to get that business, and what we think we have a clear path to over the next year or two is how do we get that business, which is positive and has been positive for the past couple quarters. We really want that business to growing, at least the category levels. And we believe the brands, the R&D portfolio that we're starting to put together and a more disciplined approach to blocking and tackling gives us an opportunity to potentially start gaining share as we go out. But, credit to that team, they've really taken something that we've seen several consecutive quarters that decline year-on-year to the point, where we feel that we're starting to see some positive growth, we still have an opportunity to expand that growth, aspiration to at least achieve what the category is done.

Great, thank you. And then one quick follow-up, how are these -- how are your specialty businesses doing versus your more kind of GP oriented businesses? Are they -- are you seeing similar trends there? Or is one doing better than the other?

Well, look, obviously the thing we're most excited about in our -- from a growth opportunity, John is our ortho business, we're -- we feel very good that we've spent a lot of time getting SureSmile at a point where we're starting to gain traction, where we have an opportunity to expand that overseas -- what's principally a U.S. program today. So, we're excited about that. We're starting to see good traction there. When our endo business, we're kind of hold and serve. I think one of the things we're excited about the fourth quarter is TruNatomy, which is really in our mind an opportunity to have a very good conversation with the endo community, the very important specialist community to us about the role of having a less invasive procedure where you're really preserving that that's what your anatomy does. So, that's, that's kind of a little bit of a different thought process and that, and it gives us an opportunity to really shine as we believe new products clinical educations what we do well, and so, especially with businesses really important to us, we feel that implants and ortho really, really moving in the right way. We think endo is hold and serve, but we -- in our mind, once we get some new product momentum, which is coming in the fourth quarter that we're very, very focused on getting that business moving faster than it is today.

And John, just you may know this, but just to clarify, both ortho and implants are a T&E segment as they relate to some of our digital technologies. The others as Don mentioned are the consumable segment.

Great, thanks, Nick. Thank you.

Thank you. And our next question will come from Tycho Peterson with JP Morgan. Your line is open.

Hey, good morning. Don. I want to go back to consumables for a minute I appreciate the call you provided before but you know as we think about what you laid out how much of the recovery is dependent on you know, the trading program ending and maybe shifting your go to market strategy versus innovation, SureFil, TruNatomy some of these things you highlighted coming out IDM?

Look, I think the alignment of retail and wholesale is that that's finished in the back half of this year. And after that it really becomes, in my opinion, an innovation story. I will also tell you having spent a fair amount of time in the field, which has been really terrific in the last couple months, I'm optimistic that we really focus on retail programs and the deal reps excited, get our reps excited, we've kind of revamped our U.S. leadership team and we're- - I think we're ramping up the effectiveness of our marketing program, I feel good that that's going to be a step in the right direction. And I tend to think that's the first three quarters of this year event.

Okay. And then maybe one for Nick on margins, you're going to exit this year at 20%. Obviously, guidance is for 20% next year, as well. So, how do we think about that dynamic is there is there a reinvestment cycle we have to think about next year, is there something that could happen additional margin recovery?

Yes, I would say Tycho, we didn't say we would exit this year 20%. Obviously, we had a good quarter, or right now, our target is been revised to be 18% to 19% versus a previous guidance, of 17% to 18% given the realization of some of the cost savings earlier. We do expect to make strategic investments that will get us into that guidance range through the end of the year. And clearly with our targeted cost savings building into next year, we feel we have very good momentum to get through that end the year 20 next year, there is no change to our view on guidance for 2020. And clearly, we feel better given where we are, year-to-date for the rest of the year.

Okay, and then maybe one last one for Don. Just can you comment on SureSmile? I know it's early days, but just curious what tracks has been like in the field?

Yes, I would say you know, first we were pretty excited that we're actually able to get our GP software up and launched. And that's been an important event for us, I think we're getting in what we're finding is that we're getting trial at the ortho level, you know, they want to understand whether the system and obviously crown [ph] is a little bit different than some of the some of the competitors, they want to understand that. So, we're getting trial there, we're getting good traction with the GPs, you know, where they're not necessarily set with a specific system. So, you know, with ortho, it's kind of how many clear liner programs do they want to be running in their office? As, you know, do they stay focused on one can we offer multiples where the GPs is not set, so we're getting a little bit more traction there. You know, the opportunity. We're also seeing SureSmile, Tycho, as you probably know, we tend to be North American focus right now. And we're looking forward to expanding that beyond the North American area right now. So, you know that that started into Europe, and we're optimistic we're going to start seeing approvals in Asia and in the not too distant future.

Thank you.

Thank you. And our next question will come from Jeff Johnson with Baird. Your line is now open.

Yes, thanks. Good morning guys. Don maybe I'll start was a Primescan question. Just can you talk about kind of product availability when you think you might be able to service, and upgrade program obviously have a very big installed base of users both in the U.S. and globally. So that could be a nice catalyst for later this year. Does that go into next year? And maybe is Primescan at all shifting the DI versus Sure conversation? How are the DI sales going with regard or relative to full direct system sales? Thanks.

Yeah, thanks, Jeff. Right now, it's going to take us to the fourth quarter to fully be able to meet demand for Primescan. Look, we're very happy with demand for Primescan so far and, again credit to our manufacturing team, they're able to get some stuff out in Q1. But demand is exceeded our ability to manufacture stuff out on Q! But demand has exceeded our ability to manufacture and we expect that -- as we get into the fall, again, demand has been good, so I can't give you an exact, this is exactly where we're going to be able to service all the demand. Based on that, and I know you're aware of this, we have not at this point offers an upgrade program, as we head into DSO, which is in October this year. We're really trying to understand what base demand is, and what is our manufacturing before we really get to consider whether we think an upgrade program is something that we want to do so, look, ultimately, we understand that we've got a large installed base, that base by the way has been really excited about it. And but until we really know exactly where we are from a manufacturing perspective, we're reluctant to go out and come an open ended that there's going to be an upgrade program. That being said, I would tell you right now, we have been very gratified that we are selling full systems, the focus of the sales force is being out and selling full systems. But I’ll also tell you, the thing that has surprised us from a little bit of an outside perspective has been the performance of DI space. When we launched the product, there was we've been [indiscernible] side, we haven’t had a lot of experience of really driving the DI space, and we've seen good results there.

Okay, that's helpful. Thank you. And then I meant to lead off, Nick, just wishing you best of luck. I've enjoyed working with you. So maybe a question for you or Don, on the consumable side. Don, as I heard, kind of your discussion of where consumables go and some of the wholesale issues, maybe in the near term here. One thing I didn't hear you really address is just kind of some of the pricing and bundling things. We're starting to hear some out of more of the competitors. And, look at now that you guys have rearrange revenue segments a couple quarters ago that 27% operating margin and consumables seems like it's probably a good 10 points higher than some of your closest competitors on this on like for like products. So, how are you feeling about pricing on the consumable side of the business, you think that can stay positive going forward, do you feel like you have to bundle or do any other initiatives just given some of the pressures we're seeing from bigger DSOs and other kind of buying groups things like that? Thanks.

Yeah, thanks, Jeff. We've been -- we feel pretty good about price in the consumable segment, we as we move up to Q2, we've been able to hold price, I believe, and I don't mean to beat a dead horse here. But we've got to be about innovation. And one of the things when we talk about your data, and we talk about shorter bill, one, we talk about this digital center, digital venture program that we're pushing out the lab space, it's all designed in our mind to really represent a significant innovation and with innovation, we're going to look to get price. So, in terms of bundling, in my mind, I don't use bundling defensively at this point and as a way of protecting the consumable business. I do think as the big ship moves forward, the opportunity we have is really working with the dentist to provide complete solutions and whether that's using our digital equipment, whether that's, the CBCT and DI program to really facilitate, better procedure outcomes and faster procedure outcomes. And we believe that if we can really get our diagnostic program working better, with either specialty products or the consumable products in a way that it helps the dentist practice better. We think that's how we win. So, whether that's -- I don't view that as a practical bundling situation as much as, the reason we put the company together is to become much more of a procedure’s solution company than an individual feature and benefits, consumable product company. So, look there's an opportunity to bundle things and we will when appropriate, but in my mind, it's less about defense then offense, and it's much more about helping them do better procedures.

Thank you. And our next question will come from the line of Jon Block with Stifel. Your line is now open.

Great. Thanks, guys. Don, some of it, and you had solid European sales, but you also had some IDS sort of shopping versus buying comments that you called out last quarter. So maybe if you can talk about your thoughts on the IDS follow through that Dentsply Sirona saw, was it Primescan specific, was it more broad based, and do you believe that does have a tail into the third quarter results? And then I've got a follow up.

Okay, good, Jon, and we'll take the follow-on obviously. IDS was interesting and first, we did see a good solid T&E event and particularly what we're seeing is in our DAC region which is Germany, Austria, Switzerland. And we talked to positive IDS results. It's hard to measure and what we were trying to figure out is how much purchasing is going to go on from beyond the dark region, because with 160,000 dentists become a very global event, where we going to see purchases. So, two things that I think we learned this IDS is that the world comes to shop at IDS, the doc, dentist come to buy. Now, the interesting impact for us that's kind of been the positive, but it's also has an offset is that particularly out of Asia, they all saw Primescan. And they all were very excited about Primescan, when we have Primescan and the problem with Primescan, we didn't have it approved. We've just gotten prime approved in Japan recently. And so, as a result, we saw a less T&E in rest of the world then we might have, if they hadn't been shopping and you've seen IDS. So, I view IDS and the word we use is shopping and we had great traffic, we had great results, very positive feedback from all the dentists that attended the event. But they go back to Japan and want to purchase Primescan and Primescan wasn't there. And as a result, we didn't sell as much omni as we may have thought we were going to, because we saw the different anticipation of when Primescan is going to come out. So again, I think IDS show that it's a very good event for us in Central Europe. We have to be thoughtful about how we forecast that business two years from now. But we're -- look, we think we had a great IDS just in terms of we were able to expose dentists to SureFil, we were able to expose them to just stuff like TruNatomy preemptively. So, it was -- in my mind, kind of like a global launch. And that saves us a lot of time from a global launch perspective, when those sales show up, is going to be more a function of when approvals are by region, then specifically tied to the IDS event.

Got it. Very helpful. And the second question, more of a clarification. So, for consumables, I think you called out, 3Q will be better than 2Q. But just to be clear, you expect consumables to return the growth in the third quarter. And then Nick, is there sort of a collective or cumulative FX headwind that you're seeing in '19, relative to the initial guidance you gave 6 plus months ago? Thanks, guys.

Yes, I just click on the FX and there is FX guidance it's a little bit more than what we gave them the last call a year-over-year, it's about $100 million. I think given the strength of the U.S. dollar, literally day-to-day and some of the continued weakness in the UK on Sterling, that might be $10 million or $20 million more versus $100 million year-over-year headwind. I think the general comment on the consumables is, we expect strengthening to the back end of the year, I get into a positive number, and certainly building momentum into next year.

Thanks, guys.

Thank you. And our next question will come from the line Steven Valiquette with Barclays. Your line is now open.

Good morning, Don, Nick and also let me wish Nick the best of luck moving forward in his career.

Thanks.

My question here is just tying a few things together. This whole notion around the Primescan demand outstripping supply in mid-2019, which is a high-class problem that had, and you mentioned in your remarks the notion of the stronger demand for Primescan in the diminished planned border of Omnicam. But it didn't seem to really have any negative impact on the 2Q sales results in the net basis. I guess we had the question is and tying into the last question. Thinking about the -- just regionally. Are we seeing that you're able to meet the demand for Primescan, maybe in North America? But maybe in other regions, there is more of a kind of a delta between this demand? Maybe just talk to regionally about the supply demand delta on Primescan? Thanks.

Thanks, Steve. Look, right now, North America is the principal area, where we're trying -- we're playing catch up to supply and demand. We feel that we've done a pretty good job on meeting demand in Europe. We recently got approvals in Asia Pacific. And once we have approval, we have to decide when we're going to launch, but it's the principal disparity right now, it's been a U.S. based issue. And we're making progress. I mean, it's not that customers are waiting months, people who are placing orders aren't getting those orders serviced and the time to - between order and when we're able to actually deliver is getting shorter and shorter. But we really haven't turned the sales force to lose yet in terms of -- let's go out and really beat the drums, because we want to be careful that somebody takes an order and we wouldn't be able to deliver it for three months. So, we're getting better at it. And again, I can't give you the exact day or the week, but we feel good by fourth quarter on a global basis, we should be able to meet demand for what we anticipate, but it's still -- that day is a little, it's still in the future.

Okay, and then just a quick theoretical question, just throw it out there on the softer [indiscernible]. I am just curious from an industry perspective, are you seeing, it may be any phenomenon that consumer directed, clear liners, which we're seeing incredibly high-volume gains across the industry. Is that perhaps is leading to software in both the GP and orthodontic and patient visits overall, maybe that's playing a role in software consumables, or do you think that's just off base and far as that theory. Just get your thoughts around that. Thanks,

That’s interesting question, Steve. I mean, I, obviously, we were watching the consumable business pretty closely. Look, we think the underlying retail patterns are not robust, but they're really not in the state of decline. So, it could be something that impacts it. But, again, if we were to draw a straight line on what we think retail, and the principal consumable, preventive resto areas over the last 18 months, 24 months, we feel that demands pretty steady, it’s not, by the way, it's not four to five, we tend to think it's one to two, and maybe in the last two quarters, it's been kind of a zero to 1.5. But, whether that's whether that's a function of people spending their money on more static and functional dentistry, that could be a factor, it's not going to be really looked at. Kind of ironic, to thinking put a clear line around on that change.

Got, a lot of theoretical language thrown out there. But I appreciate the color. Thanks.

Thank you. Our next question will come from line of Michael Cherney with Bank of America, Merrill Lynch. Your line is now open.

Thanks so much, just circling back on the consumable side and thinking about that transition with the wholesale retail side. Is there any cost associated with it, and as you think about that transition versus other companies that may have gone through certain dynamics in the past, what are the milepost, you're looking forward to feel confident that this is more temporary in nature, and will pass over time?

Thanks, Michael, for the question. From a cost basis, now, there's not a cost associated with that, we'd like to think that we're just going to get more bang for the buck for the marketing and the programs. So, I don't see there being a cost. And then the milestones that we want to see is we think retail is growing 2%, and we think we're holding share, we think our wholesale should look a lot like that. And, that's the key milepost that we're really looking at.

And just have any potential desire interest to go more direct, or is that something that's, not really in the planning right now?

I think it's interesting on the consumable side, we go through with 25 listed dealers, we think they do a pretty good job for us. There is an advantage to a dealer in terms of the dentist likes the ability to sit and talk to a dealer, and we look forward to continuing working with them. But we right now feel dentist had great access to our consumable products.

And then just one more quick one, I know this dynamic impacted consumable in the quarters you've discussed. I think there is also some dynamics, as you mentioned about the comp’s component, as you think going forward. And if you were to normalize for this, how do you feel that consumables are trending relative to all the comp adjusted factors that could be put in play?

I would say overall; we're trending below where we should be. But I think some of the things that we're putting in place, particularly the shift and the promotions that we talked about, and the new products will get us back to that positive level and where we think kind of the market is going into 2020.

Okay. Thanks, so much for the color and good luck, Nick.

Thank you.

Thanks, Michael.

Thank you. And our next question will come from the line of Erin Wright with Credit Suisse. Your line is now open.

Great, thanks. You mentioned the innovation story several times and I'm just curious kind of excluding some of the dealer and channel dynamics. Is some of those new product launches on the consumer side actually did help some underlying trend, excluding some of those external factors. And just more broadly, I guess, how should we think about the longer-term annual contribution from some of these new product launches and consumables couldn't be enough to add a percentage point or two to consumables growth on an annual basis? How should we be thinking about that? Thanks.

Thanks to the question Erin. Look, I think the consumable products tend to be much more back half have been. So I, -- what we were really limited in terms of how broad we went with shorter digital dentures comps in the fourth quarter, TruNatomy was more a Europe event in Q2 and it rolls out in the North American space, really kind of in the mid to late third quarter. So, we -- I don't think it was a big contributor to Q2 on an underlying basis, I think it'll be a much bigger contributor as we go forward in the back half of the year. I will tell you that, as we believe that our new products should be able to be a point gainer, or potentially higher in the consumables business. So, I mean, I think if you look at the base consumable business, our formula overtime is we really think that we ought to be adding innovative products that can be margin and growth accretive. So, and, we have given you guys an outlook that we think that that for us should be overtime 2% plus, and we think in the patients the way we're going to get there. So yes, I do think you have to measure -- yet have to factor in what we think the new products are going to do year-on-year. And, look, if you look at 2018, new product versus 2017, there is not a lot going on there. If you look on the consumable side, 2019 versus 2018, it's going to be positive and consumables are like -- not like a technology launch where this is a big bolus, it's more of a build. So, we're anxious to get those products out, because we think it'll excite sales force, it gives us something to talk to dentist about, they're really good product. So, we -- as we look at 2020, we really feel that those will be contributors.

Okay, great. And then on SureSmile, when do you think that will be more meaningful from a financial perspective? I know it's still early there. And then also just there's varying different strategies and clear aligners, whether it's combination or ortho focused or GP focused or direct to consumer approaches out there, what do you think is the most meaningful opportunity for you? And how did you wake up to those opportunities for testify? I guess over the near and longer term. Thanks.

Sure, we think SureSmile will become a bigger factor quarter-on-quarter-on-quarter. I mean, we think that's one of the bigger growth opportunities we have. Now remember, there's a kind of a base ortho business there, that's significantly larger than SureSmile. So, what SureSmile dose sometimes might be offset by what the base ortho business was doing. In terms of where we are, I will tell you the three base opportunities and how we're looking at SureSmile, is actually right now ex-U.S., we're really trying to focus on getting that up and running. That's one of the advantages at Dentsply Sirona, we have a global footprint. The fact is right now as we go out and push out Primescan, gives us a great opportunity to have a conversation with the prospective Primescan customers as well as our based CEREC doctors as an opportunity to sell SureSmile. And, the last issue was right now within North America, we're seeing more traction on the GP side, particularly after we launched our GP software. But we are optimistic given the capabilities and the product attributes that SureSmile that's going to be very relevant in the ortho space. The ortho space is it's a discussion about whether they want to replace a system or add a system. And that takes a little bit longer than a potential GP that doesn't have a system today. So, just in quick Erin, I think it's ex-U.S. it is partnering with Primescan. And then it was, -- I think GP will see more traction sooner than later. But we're optimistic long-term. We think we've got a great product with us.

Okay. Great. Thank you.

Thanks Erin.

Thank you. And our next question will come from line of Nathan Rich with Goldman Sachs. Your line is now open

Thanks for the questions. Don, on consumables are there any categories that you would call out in particular that drove the underperformance in the quarter? And then you mentioned the need to be more disciplined with promotional activity going forward. Can you maybe just talk about what that entails and kind of how quickly some of these changes can be implemented as we think about the go forward?

Yes, we kind of hinted at it. But our lab business was an underperformer in Q2, both in the U.S. and [indiscernible] basis, it's a business without a heck of a lot of bounce, but it's kind of our teeth, and there is some equipment business that goes there. And we were up against a tough comp in Q2 and that was based on some programs that had been done in the prior year that led to some significant orders that we're not anniversaried. And then in terms of the disciplined approach, again, it's going to take a couple quarters. And we saw some of that in Q2, we saw some in Q1, some in Q2, and we think we come out of that in the back half of this year. And, what it means is let's just really be focusing on programs that impact the dentist, and, we're working with our dealers, it's like, how do you incent the dealer rep? How do you incent our reps to really get excited about some of the new products that we're launching, and make sure that we're spending on there versus maybe we'll get a corporate program where it might be a little bit more wholesale oriented.

Okay, and just to clarify, in terms of your expectations for the back half of the year, you know, the magnitude of improvement, just between three 3Q and 4Q, just what your expectations are, as we think, over the next year quarters.

Yes, and I thought we try to spell that out in my section. So, look, I would tell you, we think Q3 is -- it's kind of if you look at the margins, we're holding them, we think that the biggest issue we're going to face Q3, and Q4 is last year TS [ph] was a big Q3 event, and it's going to be a big Q4 event this year. And we look at the new products to be much more than Q4 than a Q3 event. So, you know, that's kind of how we waited out. And then the pulse of the prepared remarks as well as other stuff. You know, we feel that Q4 is obviously bigger than Q3.

So, okay. Appreciate that. If I could just as one quick follow up on Primescan? How should we be thinking about kind of the size of the backlog at this point? And how are you managing kind of priorities for me demand is capacity ramps up as we think about, you know, the geographic expansion and getting into some of these markets in Asia pack, you know, versus getting an upgrade program in place. Can you just kind of talk about your thought process there?

Yes. And basically, the way to think about it is that it's right now we're meeting demand is just how fast you meet demand. You know, there's not a dentist that, you know, we're just saying you can't have a Primescan, it's like, okay, it's going to take us a little while to get there. And then we're prioritizing, right now North America is the priority, I mean we've got a significant opportunity here. I mean, we have a large installed base that has been very interested in line with the product. We still believe that dentistry is 17% to 18%, the U.S. is really an area that we can continue pushing. So will really make sure that the U.S. is taken care of, and that will move to other regions. But you know, they were also focused on you know, going to Japan, let's get into some of the KOLs, let's get into people who are really important to creating a story there. But it's North America right now. And then, this is not a gigantic backlog. It's just, as we look at it, we get asked the question all the time, what are you guys going to do an upgrade program? And, you know, the question is when you get on as an upgrade program, and we've been pretty consistent answering it. Say we really want to understand what the manufacturing capabilities are versus base demand and until we really get comfortable with that. That's how we're going to manage where we think we are from an upgrade program.

Great. Thanks for the question.

Thank you. And our next question will come by Brandon Couillard, Jefferies. Your line is now open.

Thanks. Good morning. Now you just touched on the emerging portfolio and whether that was a positive contributor to growth continued in the quarter and then just how you're feeling about the pricing backdrop is for the market overall?

Imaging was positive. If you look at the Q2, we were positive across everything in the T&E segment. We're anxious to get some of the products that we talked about and IDS approved in the U.S., we think as a fourth quarter event. Right now, the imaging businesses, we've seen a lot of price compression over the last 18-24 months. Now we built that into our budget or forecast and our guidance. So, we're not seeing significant changes versus what expectations are, and then innovate [ph].

A follow-up for Nick. You still expect operating cash flow to be up year-over-year in '19. And then D have an updated figure for us on CapEx for the year?

Yeah, the CapEx Brendan out will be for our guidance 165 to 175. Imagine that very tightly. And then in terms of cash flow, we got to expect us to be a good cash flow year, purely as we told the street, we get about $120 million and onetime our restructuring cash that will go out this year. The majority that will be in the second half. So that will be one time in terms of charges. But from an operating cash flow standpoint, clearly the operating income is going to be good year-over-year. And we're working on our working capital as well.

Thank you.

Thank you. Our next question will come from the line of Steve Busha [ph]. Your line is now open.

Thank you, Nick, for all your help over the last couple of years. Certainly, wish you all the best there.

Thanks Steve. Appreciate it.

As far as that are questions, I had a couple for Don. And just one quick one for Nick. But Don, I wonder if

Hey Steve, you're breaking up. Like we're getting every third word and say, early 70s horror movie?

Well, I'm a fan of those. But we'll try to do better here on the -- trying again. So, I guess first for Don, I was hoping you could apply it on a couple things. One is, in your assumption for the back half, do you think there are any changes in terms of the end market outlook. You're one of few that hasn't spiked out Europe and Germany. You clearly had a really good quarter in Europe, anything you see there. Second, I was hoping you could give us just an update on how you're seeing sales force efficiency progress. You've made some significant changes to how the sales force operates. So, just some perspective on how those changes are going to be really helpful. And then one just quick one for you, Nick. I wonder if you could speak to the medium-term outlook for the tax rate. The guidance went up and you give some very clear commentary as why that happened. But some perspective on how things roll out in future years would be great. Thank you.

Sure. Thanks, Steve. I'm always happy to opine, as my management team would attest. But you look end market, particularly in Europe, we actually, we feel pretty good that our underlying demand has been okay. The challenge for us, there is a couple things going on. We saw a little bit of a spike in Q1 that had a ripple on Q2, which was Brexit. People were ordering anticipating that was going to happen when it didn't. And that was some inventory shifting around. But underlying demand Europe, rest of the world, we feel pretty solid. And again, around in our mind we just got to make sure we're aligning wholesale and retail shipments and lab was a drag for us in Europe, and the rest of the world in Q2. We feel good that that takes care of itself kind of in the back half of the year. On SAP, a couple things on SAP. First, we are operating in the U.S. We haven't ruled -- we will rule SAP out to other regions Germany, China, Japan, and other places over the course of the next 12 months. The SAP and we we've talked a little bit about this before. First, we move everyone to sales force, we did a real segmentation and we've been focusing on what we believe are higher priority doctors. We've had to train sales force to be fluent. And one of the things we're trying to do is be able to represent or have a conversation about all of these products, even though you may be going into just selling them. That's going pretty well. My experience with doing big SAP programs. Look, it takes six months to people you really measuring things reliably on KPIs. What we're seeing is the trend lines of reps who are in territories for a while. We're starting to see what we want to see, so we're pretty comfortable with the progress they're making to non-financial metrics. And from an underlying perspective, we're pretty comfortable with where we are financially. I do think in, you know, a quarter or two will be in a better position to really put some meat on the bones in terms of report out against some KPI for you, for you guys to get some visibility on that.

Steve, on taxes obviously, the tax reform works against us, given us a we have a high percentage of our income coming out Central Europe, I think the current target is 2475 for the year reflects the balance of earnings as we expect them. And that's probably a pretty good benchmark, plus or minus 50 basis points going into the future. But tax reform around the world is evolving, and I'm certainly not one they can predict that. We'll take the next question, please?

Thank you. Our next question will come from Kevin Caliendo with UBS. Your line is now open.

Hi, guys, thanks for taking my questions. So just told me understand what percentage of your consumables is currently retail versus wholesale. And what do you expect it to be once this shift is over?

Yes, Kevin, it's all in either way. Look, that is what's at the end market. So, all of our cells are retail, it's just, you know, how do you, what it through dealers? So, it's, you know, one of the dealers buying versus one who are identifying.

So, what is the -- what is the shift like? What are we talking about in terms of magnitude of shift of the percentage of your consumable products that you think are going to go out of dealers and maybe directed dentist?

Yes. Kevin we've reduced dialogue, and we commented on was this our promotional efforts, are going to be more targeted towards driving into retail demand, as opposed to working directly just directly with the wholesalers in terms of promotions. So, it's really just redirecting marketing effort.

Yes. And, what you think of that, in all of our stuff we'll go through dealers, to the dentist, I mean, we're not going direct. It's just basically, we're trying to align, you know, if retail is growing at 3%. We want to see wholesale grow and 3%. We don't want to see wholesale grow one quarter at 9, the next quarter down 4 when underlying retail demand is relatively stable.

Okay, now, I understand now and is there is this question of inventories? Or is it just a question of timing? It's just interesting that there's such a scatter shot of that, if it's just a question of timing of...

Yes, and I would say the one thing, you have to be mindful, we're talking about couple of small percentage points up and down on our base of business. So, you know, it's not a lot of dollars in each of the markets for each of the products. It's really just a realignment of our wanting to have more direct market stimulated. So, it's a look at it... And selling it, we're just -- we're being measured in terms of what a dentist wants it right now. We want to be able to deliver it as quickly and reliably as we can. And right now, there's a little bit of a difference between when they purchase and when they get the product. And that's what we're working through right now. But you know, and look, I would like I would love to have more Primescan, you know, particularly ex-U.S., and that's what we're working through right now. But we saw the 75% and improved every day.

I understand the install base is enormous. For Primescan to penetrate, but have you contemplated sort of doing what a line did with iTero and Invisalign, where they basically went and marketed directly to some large DSOs and were able to get big chunks of share doing that. Obviously, now you have the liner to be able to offer that a strategy you've contemplated, is that available to you?

It's absolutely available to us. And it's we're not contemplating it. I mean, we're doing I mean, look, our relationship with the DSOs is really important, you know, we've had some good success with Primescan and in terms of some of the DSOs representing at all the time, and one of the first questions we get asked is, you know, do you have a program that you can put together with this and the answer is yes.

What do you think drive the, what would drive that sale? Would it be the liner or itself or would it be the scanner meaning like for the GP matters more?

Kevin, we're about eight years past the hour, we're going to have to limit to one question.

Sure.

We'll get by offline

We'll give you a call, and we can run through some of those stuffs.

Okay, no worries. Thanks guys. Appreciate the time.

No problem.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So, now, I’ll hand the conference back over to Mr. John Sweeney, for any closing comments or remarks.

Yeah, I wanted to close before John did and I mentioned in my prepared remarks, that this is Nick's last call, but I do really and want to thank you for all the work and, he were in the middle of call, and you guys know these calls are, Nick has got a game face on right here, he’s got papers all spread out and he has been an absolute -- unbelievably good partner to work with and on behalf of all Dentsply Sirona, Nick, thank you.

Thanks, Don. Thanks everybody for joining us, and we look forward to updating you as we move through the quarter and our next quarterly earnings call. Have a good day.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.